A question about stocks and dividends. How does a company decide if it will pay dividends to its shareholders?

Question

For example, if a gold-mining company is making revenue, does it always pay dividends? What does it depend on?

Answer 1

Technically, the decision to pay out dividends is made by the owners of the company, and as a stockholder, you are part owner, so part of that decision is yours. To a small investor, the decision to pay dividends often seems completely random. A company only has a few options regarding what to do with the money they make. Small and/or fast growing companies often reinvest their profits into growing the business. Larger or slower growing companies often look towards returning some of that money to their owners (shareholders). They can do this in 2 ways, offer a dividend, or buy back stock. By buying back stock, they increase the percentage of the company that the remaining shares represent.

Some generalities can be made, larger companies are more likely to offer a dividend than smaller companies. Certain types of companies are also more likely to offer dividends, natural resource companies, like gold, copper, oil, lumber are more likely to offer dividends. Utilities are also well known for their dividends. Looking at their dividend history can also tell you something, some companies have a long history of maintaining or increasing their dividends, these companies are likely to continue these trends. Aside from these generalities though, there isn't a hard and fast rule. Companies pay dividends when enough of the owners decide they should, and when the company can afford it.

An above poster mentioned that Canadian companies pay higher dividends. This is true, because of the tax structure in Canada, given changes in the American tax structure, dividends in America have increased over the past several years. If you do look at investing in a foreign company, consider the tax implications, taxes will be withheld on dividends from a Canadian stock, if those shares are in a taxable account you can claim that on your tax returns, but if the shares are in an IRA you can’t, that money is lost.

Answer 2

There is no one specific factor that makes a company start paying dividends -- however, here are a few things that they take into consideration:

1. Once a company started paying dividends, there is an expectation on the part of investors that it will continue. If a company stops paying dividends, then the market takes that as a very bad signal and punishes the company. Stock prices fall (on average) by 5-10% when they stop. Therefore, a company should not start paying dividends unless they believe that they can continue to do so.

2. Growth companies can't really afford to pay dividends because they need to plow their earnings back into the company.

3. In the past, there was a large tax disadvantage to paying dividends. Companies would elect to repurchase shares rather than pay dividends, because dividends were taxed as ordinary income, while the proceeds on repurchased shares were only taxed on the profits made -- and at the capital gains rate. This changed with Bush's recent tax law change -- where dividends are now taxed at 15%, A lot of companies that didn't pay dividends started paying dividends after that.

The bottom line is that companies that are more mature and do not need to plow their profits into growth will pay dividends. Young growth companies do not.

Answer 3

This is a very interesting questions because it has many sides to it. Considering the Economy as a whole dividends is a welfare concept and every company is supposed to pay dividends on an ethical basis to preserve welfare. So teaches Welfare Economics:Baumol.
For your question as to how companies pay dividends, first the company checks up from their present performance and evaluates their future needs of cash. From this they figure out how much cash is required for the next accounting year and if they have excess over that they pay dividends, else they don't. Well planned companies pay dividends on an annual basis since they have good corporate plan in place which include annual dividend decisions. Dividend decision making is an important part of Finance curriculum. Hoarding cash is against sound economic policies for companies or for anybody in an economy. So to maximise optimal use of money dividends are made.

Answer 4

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RE:
A question about stocks and dividends. How does a company decide if it will pay dividends to its shareholders?
For example, if a gold-mining company is making revenue, does it always pay dividends? What does it depend on?

Answer 5

Not all companies pay dividends. Whether a company pays a dividend will depend on a number of factors. Capital investments or capital improvements to existing facilities can have an impact on dividend payments. Another could be to fore go dividends in order to reduce debt or to make an acquisition. And of course, a company cannot pay a dividend unless they make a profit.

Answer 6

Any company can make the decision to pay dividends, as long as they have the cash. They may decide not to pay the cash out as dividends because there may be a better way to spend the money, as in capital projects.

Answer 7

It depends on the outcome of board meetings.
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Answer 8

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Answer 9

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