Why companies pay dividends

Dividends represent the distribution of corporate profits to shareholders, based on the number of 

shares held in the company.

Dividends are often part of a company's strategy. However, they are under no obligation to repay 

shareholders using dividends. Because investors can sell a portion of their shares or portfolio if they 

need funds.

• To attract new and maintain current investors

The overall performance of a company on the stock exchange over a given period helps investors to decide on whether to buy stocks or not within the listed companies on the stock market. Hence paying dividends will attract potential investors.

• To provide investors with a return on their investment

Taking out a portion of the revenue to pay back to the shareholders as dividends so that they don’t sell 

their shares. Because as mentioned no new investors would likely be willing to invest due to the low 

profitability of a business.

• Paying dividends demonstrates the financial strength

A corporation's dividend policy is determined by the board of directors. They decide not only how much 

of the company's profits to distribute in the form of dividends, but also when and how often such 

payments should be made. An amount decided upon by the board of directors shouldn’t 

overstrain the business’ working capital. Because the money paid to the investors isn’t reinvested into 

the business.

• Pay off debt

For example, in 2013 Dell Technologies founded in 1988 by Micheal Dell decided to go private to focus 

more on its long-term strategy without having to be pressured by the short term growth, profitability, 

and equity analysts' focus on quarterly earnings. On 2 July 2018, Dell decided to register back as a 

private company. 

A business can weigh in the option of going private to focus on it’s long term growth. And once the business recovers from it’s debts/loss it can register again to be a private company.