Triston Martin
Aug 29, 2022
It was unheard of to invest in dividends when the internet bubble burst in the late 1990s. When the market rose by double digits, no one was interested in a dividend yield of just 2%. Dividends have recently become popular again after losing their luster during the bull market of the '90s.
Many shareholders now see the wisdom in purchasing dividend-paying stocks. Despite many market booms since the 1990s, "boring" dividend stocks remain one of the most pleasing possibilities for casual investors.
Dividends are a distribution of a company's profits to shareholders. The board of directors makes the announcement and sends it out to shareholders. For investors, dividends represent their ownership stake in a firm and the profits generated by their investment. Except for option methods, dividends are the sole means for shareholders to benefit from stock ownership without selling all of their shares.
The shifts at Microsoft that transpired that year are a prime example of what may occur when a company's growth slows. As a result of having so much money on hand, Microsoft declared a dividend in January 2003.
At the time, the corporation struggled to develop enough good ideas to fund with its capital. 1 After all, even the most impressive rising stock eventually crashes. The fact that Microsoft began dividend payments did not spell the death of the corporation.
Instead, it showed that Microsoft had grown to be a huge corporation and had reached a new phase of its development, which meant it was unlikely to see more rapid growth in the form of double- and triple-digit percentage increases. Microsoft increased its dividend by 9.5%, to 46 cents per share, in September 2018.
By distributing earnings to shareholders in the form of dividends, management effectively admits that shareholders would benefit more from receiving these funds than from reinvestment in the firm.
That is to say, the company's leadership thinks that shareholders won't get as good of a return by reinvesting earnings in the company to fuel further expansion as they would be receiving a dividend payment.
Another reason a firm distributes dividends is that doing so is a strong indicator of the company's ongoing prosperity, mainly if the dividend distribution has been consistently growing.
Profits are invested back into the firm after the board of directors determines what portion of earnings will be distributed to shareholders. Dividends are typically paid out four times a year, but shareholders should keep in mind that the corporation is under no obligation to do so.
However, it is unusual for a corporation to suddenly discontinue paying dividends, especially one with a long track record. It would be disastrous for a well-established business to suddenly stop making dividend payments to its investors if its shareholders were accustomed to receiving them every quarter.
Suppose a firm suddenly stops paying dividends without an apparent strategic reason, such as reinvesting all retained earnings into growth projects. In that case, that should raise red flags about the business's health. This is why boards of directors often take considerable pains to maintain a stable dividend payout.
It would help if you compared the volatility and share price performance of dividend stocks with those of pure growth stocks that do not pay dividends when weighing the benefits and downsides of dividend stocks.
Investors may be sure they will continue receiving dividend income consistently for as long as they keep shares in a public company. Such businesses often suffer severe reactions from the market if they cancel or cut dividend payments.
The pricing behavior of dividend-paying equities differs from that of growth stocks because they might be viewed as quasi-bonds.
Like share prices, dividends are vulnerable to factors unique to individual companies and the market. When circumstances are rough, the upper echelons of management will have to decide what to do with the payouts.
Consider the banking industry amid the Great Recession of 2008-09. Before the financial crisis, banks had a track record of generous dividend payments. When the banks began failing, and the government stepped in with bailouts, dividend yields increased while share prices declined because investors no longer saw these firms as stable with high yields.
A business can't expand forever. As a firm matures and its development opportunities are depleted, paying dividends to shareholders is one of the most acceptable ways to continue rewarding them for their investment.
When a firm announces a dividend, it may indicate its growth has paused, but it also shows its stable ability to generate profits. When distributed in the form of dividends consistently, this stable income is likely to moderate prices.
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