Why do investors like dividend-paying stocks? Why do companies choose to pay dividends in the first place? And what might impact corporates’ ability to return cash to shareholders in the long run?
Reasons vary. Some shareholders are drawn to the steady income theoretically offered by dividends – which are of particular benefit to those in retirement. All things being equal, equities can approximate fixed-income securities – but with the bonus of payments potentially increasing over time, rather than being tied to a fixed coupon. For others, dividends provide a useful indication of a business’s balance sheet strength, and signal whether bosses are positive about future earnings.
For a company, aside from inspiring confidence among investors, dividends can represent an efficient way to reduce an otherwise unnecessary cash pile – for lack of any near-term investment options.