Why companies pay dividends

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Introduction:

Dividends represent one of the methods in which firms divided their profit generated by companies' activity. Dividends are usually a cash payment, which are paid on a quarterly or an annual. It is depends on the company dividend policy and, currently, there are many discussions about whether it is necessary for organizations to pay dividends or it is better not to pay them. Depending on the aims of the firm and current position in the market, a company may take one or another decision. This work will deal with questions of why companies pay dividends and why it is very important.

The dividend policy of the company has a great influence not only on the capital structure, but also on the investment attractiveness of a firm. It must be also be noted that if dividends are rather high and paid regularly, it is one of the signs that the company has been working successfully and earns profit.

Hence, dividends are an essential link of the company's financial policy and present an important part of the management strategy of the company, affecting the processes of investment and use of capital.

Literature review:

Currently, many organizations pay dividends to their shareholders, which represent the amount of money of company’s profit. The methods and decision on paying dividends depends on the goals of organizations, therefore, every company determines their own dividend policy.

First of all, it is necessary to define the notion of dividends. Many researchers determine them as payments which a firm made to its shareholders (Brealey, et al., 2008). Damodaran (2001) states another way to describe dividends as one of the mode which help shareholders to return their money.

Having considered the definition, the work ca...

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... attract new investors from the market, to demonstrate good results in companies’ performance, to control improper managers and besides the dividends can solve the problem of massive money supply.

Works Cited

Cohen, Gil and Yagil, Joseph (2009) ‘Why do financially distressed firms pay dividends?’ Applied Economics Letters, 16, pp. 1201-1204

DeAngelo, H., DeAngeloa, L., Stulz, R.M. (2006) ‘Dividend policy and the earned/contributed capital mix: a test of the life-cycle theory’ Journal of Financial Economics, 81, pp. 227–254

Feldstein, Martin and Green, Jerry (1983) ‘Why do companies pay Dividends?’American Economic Review, Vol. 73, No. 1, pp. 17-30

Lewis, T. W. Cheng, Hung Gay Fung and Leung, T. Y. (2007) ‘Why do poorly performing firms pay cash dividends in Mainland China?’International Review of Accounting, Banking and Finance, Vol. 1, No. 1, pp.55-75

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