Why would a company distribute its earnings through dividends, to common stockholders?



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Why would a company distribute its earnings through dividends, to common stockholders?

1 Answer(s)


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When a company makes a net profit, which is otherwise known as the net income, that net income number is what is supposed to go to the shareholders of the company, theoretically. However a company's board of directors can decide how they want to use the cash generated during the net income or the profits. The board can use the net income for a variety of reasons. Number 1 - they can reinvest the money back into the company to set up new factories to hire more people, to invest in researching development, to build new products, to scale to new markets, etc.

Number 2 - the board could decide to peer the earnings just as cash in the balance sheet, so the money will sit in cash in some bank account or some liquid investment, so that the company can use it whenever it needs to. Number 3 - the bard could decide to take part of the profits and give it out to shareholders or the stockholders. The company will decide on the 3rd option, which is to pay or distribute its earnings to its stockholders due to the following reasons. Number 1 - the company probably does not have a good use of its money. The company is not sure how exactly to use its cash and hence it might choose that the best way to use the cash is to pay out to its stockholders.

Number 2 - the company might be a mature company and it might be a company where the stockholders expect the company to pay its dividends. In which case the company has to do what the stockholders wanted to do. These are typically the 2 common reasons why companies distribute their earnings through dividends to their common stock holders.

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