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While we're on the topic, can anyone explain to me the purpose of paying dividends? When I try to look this up, all I get is the definition of a dividend. Would

by rjeli 9y ago

While we're on the topic, can anyone explain to me the purpose of paying dividends? When I try to look this up, all I get is the definition of a dividend. Wouldn't that money be better going back into the company, increasing its value to the investors the same amount, but now with more capital for innovation/survival? Why do companies incentivize investors to hold their stock?

skybrian 9y ago
The whole point is to make money for the owners. For any individual investor, they can sell, but not the owners as a whole. Buying the stock back when it's undervalued might be a better way to do it, though.
- firebones 9y ago
  From what I've seen, buybacks are often more about preventing dilution due to share-based compensation; they're effectively a tax-advantaged dividend. However, they can also be a sign of a company that has no better idea for spending their capital, which can indicate a decline in the ROI of their R&D. Could HP and IBM have done better with their cash over the last 10-15 years than buying back stock? Share repurchases seem to obfuscate with plausible deniability whether the intent is to return capital in a tax-advantaged way, or whether there's just a basic lack of faith in investing in new innovations.
  - walshemj 9y ago
    Id rather just have the cash in my hand rather than some hypothetical increase in the share price. Then again all my shares are in an ISA so I don't pay tax on dividends
wbl 9y ago
Some companies are good at one thing and don't want to expand. They think investors have better opportunities outside.
- dsacco 9y ago
  Elegantly stated.
callmeed 9y ago
dividends usually come from mature companies (think coca cola and chase bank). a dividend signals that they're likely not going anywhere. some investors like the guaranteed income. dividends are attractive in this regard, especially in a bear market. some companies–like apple–just have too much money on hand so a dividend makes sense.
ouid 9y ago
if you've saturated the market, it's usually less efficient to spend your profits trying to expand your business somehow than to simply let your investors take that return and invest it as they see fit.
kd5bjo 9y ago
Without dividends, stocks wouldn't exist as a financial instrument, as there's otherwise no payout for the person stuck holding shares of the company at the end. In a purely rational market, the value of a stock should be the present value of future dividends that share will pay out. Price fluctuations reflect investors' changing estimates of what that ultimate payout will be, based on how well the company is doing.
- xapata 9y ago
  Dividends or the expectation of asset liquidation. A company can wind down and sell its patents, for example. I suppose you could say the sales proceeds are dividends as well, but they're not what one typically thinks of as dividends.
SyneRyder 9y ago
On the investor side at least, some investors actually want an ongoing income stream, especially retirees or someone wanting a passive income. Paper valuations don't pay for groceries & bills & travel. When bank savings interest rates are low (1 - 2%), shares with dividend payouts of 7% and higher look attractive, especially from a stable company (like a national supermarket chain or a telecommunications near-monopoly). And some stocks have a progressive dividend, ie they pledge to increase their dividend payout per share each year. (So in my case, one of the shares I bought about 10 years ago now pays out the equivalent of an 18% return to me in dividends every year.) As the dividend payouts increase, people are prepared to pay more for the stock, so it pushes the share price. (So that 18% yield stock has since tripled in price, as many investors are happy to just take a 6% return instead.)
- pellucide 9y ago
  18% yield is awesome. Care to reveal the name of the company ? If I were to take a guess, it would have to be Costco or AT&T
  - SyneRyder 9y ago
    Eeek, that should have been 14%, not 18% (sorry, my mistake!). I'm in Australia, and the company is Wesfarmers (WES.AX), an Australian mining company that diversified into retail, bought the second-largest supermarket chain in Australia, and now 87% of their earnings comes from retail. I bought most of my shares at the very bottom when they did a capital raising at $13.50 (start of 2009). Today it pays $1.98 annual dividend per share. (Today's share price is $43.29). I've obviously cherry-picked my best example ;) But I also got close with JB Hi-Fi (JBH.AX), bought them at $10.24 in 2012, today it pays $1.09 annual dividend per share (so yielding 10.6% on the price I bought at, and the share price today is $25.65). I wrote more about my method in this HN comment a couple of years ago: https://news.ycombinator.com/item?id=10904190 https://news.ycombinator.com/item?id=10904190 Basically I look for stocks that are yielding 6 - 8%, check for a pattern of steadily growing dividends, and make sure it isn't suddenly high-yield because it's about to go bankrupt or in a dying industry. Hope that helps!

by rjeli 9y ago

skybrian 9y ago

The whole point is to make money for the owners. For any individual investor, they can sell, but not the owners as a whole. Buying the stock back when it's undervalued might be a better way to do it, though.

firebones 9y ago
From what I've seen, buybacks are often more about preventing dilution due to share-based compensation; they're effectively a tax-advantaged dividend. However, they can also be a sign of a company that has no better idea for spending their capital, which can indicate a decline in the ROI of their R&D. Could HP and IBM have done better with their cash over the last 10-15 years than buying back stock? Share repurchases seem to obfuscate with plausible deniability whether the intent is to return capital in a tax-advantaged way, or whether there's just a basic lack of faith in investing in new innovations.
- walshemj 9y ago
  Id rather just have the cash in my hand rather than some hypothetical increase in the share price. Then again all my shares are in an ISA so I don't pay tax on dividends

wbl 9y ago

Some companies are good at one thing and don't want to expand. They think investors have better opportunities outside.

dsacco 9y ago
Elegantly stated.

callmeed 9y ago

dividends usually come from mature companies (think coca cola and chase bank). a dividend signals that they're likely not going anywhere. some investors like the guaranteed income. dividends are attractive in this regard, especially in a bear market. some companies–like apple–just have too much money on hand so a dividend makes sense.

ouid 9y ago

if you've saturated the market, it's usually less efficient to spend your profits trying to expand your business somehow than to simply let your investors take that return and invest it as they see fit.

kd5bjo 9y ago

Without dividends, stocks wouldn't exist as a financial instrument, as there's otherwise no payout for the person stuck holding shares of the company at the end. In a purely rational market, the value of a stock should be the present value of future dividends that share will pay out. Price fluctuations reflect investors' changing estimates of what that ultimate payout will be, based on how well the company is doing.

xapata 9y ago
Dividends or the expectation of asset liquidation. A company can wind down and sell its patents, for example. I suppose you could say the sales proceeds are dividends as well, but they're not what one typically thinks of as dividends.

SyneRyder 9y ago

On the investor side at least, some investors actually want an ongoing income stream, especially retirees or someone wanting a passive income. Paper valuations don't pay for groceries & bills & travel. When bank savings interest rates are low (1 - 2%), shares with dividend payouts of 7% and higher look attractive, especially from a stable company (like a national supermarket chain or a telecommunications near-monopoly). And some stocks have a progressive dividend, ie they pledge to increase their dividend payout per share each year. (So in my case, one of the shares I bought about 10 years ago now pays out the equivalent of an 18% return to me in dividends every year.) As the dividend payouts increase, people are prepared to pay more for the stock, so it pushes the share price. (So that 18% yield stock has since tripled in price, as many investors are happy to just take a 6% return instead.)

pellucide 9y ago
18% yield is awesome. Care to reveal the name of the company ? If I were to take a guess, it would have to be Costco or AT&T
- SyneRyder 9y ago
  Eeek, that should have been 14%, not 18% (sorry, my mistake!). I'm in Australia, and the company is Wesfarmers (WES.AX), an Australian mining company that diversified into retail, bought the second-largest supermarket chain in Australia, and now 87% of their earnings comes from retail. I bought most of my shares at the very bottom when they did a capital raising at $13.50 (start of 2009). Today it pays $1.98 annual dividend per share. (Today's share price is $43.29). I've obviously cherry-picked my best example ;) But I also got close with JB Hi-Fi (JBH.AX), bought them at $10.24 in 2012, today it pays $1.09 annual dividend per share (so yielding 10.6% on the price I bought at, and the share price today is $25.65). I wrote more about my method in this HN comment a couple of years ago: https://news.ycombinator.com/item?id=10904190 https://news.ycombinator.com/item?id=10904190 Basically I look for stocks that are yielding 6 - 8%, check for a pattern of steadily growing dividends, and make sure it isn't suddenly high-yield because it's about to go bankrupt or in a dying industry. Hope that helps!