You may be wondering, why not all companies pay dividends to their shareholder? This article will explain to you the reasons.
What are Dividends?
The dividend is the distribution of profits given by the company and comes from the profits generated by its business. dividends are given after obtaining approval from the shareholders at the general meeting of shareholders.
If an investor wants to get a dividend, then he must hold the shares for a relatively long period of time. In order to receive the dividend, an investor should hold the shares until the period that he is recognized as an eligible shareholder. Cash dividends are the most common; however, you can also receive the dividend as shares of stock.
Why Do Companies Pay Dividend?
Dividends allow companies to share their profits with shareholders. It is a form of thanking the investors for their continuous support with better returns and incentivizing them to keep holding the stock. However, in order for a company to share profits with investors, it must first make profits. As a result, well-established enterprises that earn steady revenue are more likely to pay dividends.
Dividends can be a great approach to attract investors because they know they’ll get a steady stream of income from the stock no matter what happens to its share price. Dividends are especially useful during periods when stock values are stagnant or decreasing, as investors still want to make money.
Why Some Companies Do Not Pay Dividend?
The dividend is something that investors are waiting for. But not all companies pay dividends. Although dividends can attract more investors, there are also some reasons why some companies don’t.
When companies distribute profits to shareholders, they are not reinvesting them back into the business. Those that have paid good dividends in the past may not do so in the future if they are planning an acquisition or other large-scale investment. Eventually, those reinvestments will help the company’s growth, raising the stock price. Dividends are less common among startups and other rapidly growing businesses that must reinvest in order to survive.
Dividends are more likely to be paid by large, well-established companies than by start-ups or smaller companies. This is because, rather than paying out profits to shareholders, smaller businesses generally need to reinvest their gains to grow their business over time.
Dividend Paying Companies
Large companies with more predictable growth are often the best dividend payers. Quality companies produce and reliable and growing dividends over time. Because they want to maximize shareholder wealth in ways aside from normal growth. Companies in the following industry sectors tend to maintain a regular record of dividend payments:
- Basic materials
- Oil and gas
- Banks and financial companies
- Pharmaceuticals and healthcare
Start-ups in industries such as biotech or technology may not offer regular dividends. Because these companies can be in the process of initial development. They may incur high costs (as well as losses) attributed to research and development, product launches, operational activities, so their funds are not sufficient to pay dividends.
To read more about Islamic Finance related topics, please click here and visit our academy.
Feel free to sign up for our free stock screening services at musaffa.com.