Why do companies pay divdends? why don't they keep the money?

Question

Why do companies pay divdends? why don't they keep the money?

Answer 1

The stock holders are the owners of the company, and they demand a return on their investment.

Answer 2

Would you invest in a company that didn't share it's profits with you?

Answer 3

They do keep some of it. The money that they keep for themselves is called retained earnings.

Retained earnings is the portion of net income (revenue minus expenses) that the company keeps for itself. A company will usually keep most of it's net income as retained earnings, but they also have the option of returning some of that income to shareholders in the form of dividends.

They do this because high dividends can make a company's stock look attractive. There are whole mutual funds which deal entierly with funds that give out a steady dividend, like banks and financial corporations and such. a lot of people buy stocks with dividends beacuse it's a little extra stream of income for them, rather than just relying on the return on the actual stock.

For example, if you owned 100 (say they sell for a dollar)shares in BTG Awesome Financial Corporation, and each share received an annual dividend of $0.10, at the end of the year you'd have made $10 from the dividend alone!

Depending on the stock's price, the dividend yield can change. For example, if Stock A was priced at $4.00 and they announced a dividend of $0.50 then the dividend yield is 12.5% (0.5/4 =0.125 or dividend/stock price=dividend yield).

Dividends can make a stock quite attractive to a prospective owner!

Great question, and good luck!