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What is a dividend? There are many companies which pay dividends. On the other side some companies do not pay dividends. To understand that why these companies don’t pay dividends it is important to know what a dividend is? A dividend is a portion of the profit the company makes paid to each shareholder. If a company does not distribute this money in the form of dividends, they can use it to reinvest in themselves. The directors of the company look at the financial health of the company and decide whether it’s better to pay some of the profit to the shareholders or to do something else with the money. A good company with a reliable dividend can earn you money every quarter just for owning a share of stock. There are a number of reasons that why some companies don’t prefer to pay dividends. Some of the reasons are: • A company that is growing rapidly generally will not pay dividends, for the reason that it wants to invest as much as possible into further growth. Even a mature firm will also choose not to pay dividends because it believes that it will do a better job increasing its value by reinvesting its earnings. • A company may also not pay a dividend it the board of directors thinks it’s better to put the business’s profit to work making the business itself more valuable. • Another reason that some companies choose to not to pay dividends is they are not financially stable. They might be going through a hard time in their particular industry. So at the current situation they may not be able to afford to issue a dividend but in future they might do so. • It is also possible that a company doesn’t pay dividends because it thinks that the decision of start paying dividends or to increase dividend payment is a serious one. We can take an example of Warren Buffet’s company Berkshire, which doesn’t pay dividends. There are many reasons behind it such as: According to the Warren Buffet, Reinvesting the profits in the business is much better than paying the dividends. It is an indirect way to increase the investor’s wealth. He prefers to invest in the existing business, or using it to grow through acquisitions. The trend in US and UK was hard cash for the companies. They even brought the head count down in order to control costs. In 2012, his company Berkshire increased its capital investment by nearly 20% as compare to FY11. Summary – Dividend is an important part of your investment return. They mostly paid on a quarterly basis. When the performance of dividend paying stocks is compared to non-dividend paying stocks, the difference can be quite surprising. Investors should always keep in mind that it is not necessary that all the companies pay dividends. They should also be aware in one case that some companies facing difficult time might raise their dividend payout to appear more attractive. Do believe them and always check to see what the real cash flow situation is before you chase down the highest dividends. Dividendinvestor provides additional dividend stocks data, information or screening tools, we encourage you to visit the website. A leading source for in-depth research & analysis on dividend paying stocks
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