A brief discussion on how and why companies pay dividends to shareholders.
Written in 2009; 868 words; 2 sources; APA; $ 30.95
Paper Summary:
The paper discusses how dividends are often viewed as a measure of a company's financial and operational stability, with dividend growth an indication of success and dividend decline an indication of financial trouble. The paper then explains that in as much as dividend policy is viewed in certain ways by the market, for management it is viewed as a way to send signals to the market. The paper looks at the reasons why a company would not pay dividends and discusses the different ways in which a company can pay out a dividend.
From the Paper:
"Companies pay out dividends for a few different reasons. The first is that the income stream helps to attract investors. Theoretically, the value of a company's stock is the net present value of all future cash flows, and dividends are those cash flows. In practice, investors also seek capital gains, but the income stream from dividends remains attractive in that it provides a degree of certainty with regards to the future cash flows.
"The degree of certainty is provided by the fact that dividends are often viewed as a measure of a company's financial and operational stability. A company typically only decides to pay dividends once it achieves stability. Moreover, once a dividend is set, companies are reticent to decrease that dividend because such a move will cause the stock value to fall, reducing the firm's attractiveness to investors. So not only does the presence of a dividend indicate a degree of stability, but dividend growth does as well; and a decline in dividends is viewed as being indicative of financial trouble."
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