EDIT: man rustled some jimmies by challenging convention. Sorry if people don’t want to think that big institutions can pull strings to decide which sectors are paying them cash from profits and which companies reinvest for growth. And that they could be doing this at competing companies for the best interest of their holdings and not the actual companies.
TL;DR convince me that dividends aren’t just a scam to give big investment firms consistent cash flow.
I understand the reasons why companies SAY they pay dividends, but I’m going to break down why none of them make any sense at their core. Coca Cola for example, pays $8B/yr in dividends for absolutely no reason.
- “Sharing profits and returning value to shareholders”
Put simply, why? Conventional wisdom states an established company that has reached maturity starts paying dividends because the money cannot be utilized efficiently to further grow the company. That makes absolutely no sense. Would you ever decide that you’d rather throw away your own cash just because you have nothing better to do with it? No. Invest it, buy another company, or figure out why you don’t have good enough people to find out a good way to spend billions of extra dollars every year.
- “Shareholders need a return on investment.”
Again, why? The company IPO’d at some point and raised money off investors. The company presumably grew and investors made money on their investment. If the company is no longer growing but still making billions in revenue, then their investment should still increase in value. If they want to cash out for other opportunities, they can sell their shares. All paying a dividend does is reduce the value of the company by the amount of the dividend. If an equivalent amount of stock were sold every year by investors, it would achieve the same result without bleeding the company.
- “A strong stock price helps retain employees and improve brand image”
No, no it doesn’t. Do you think it’s an efficient use of funds to pay billions of dollars every year to prop up your stock price in order to retain employees instead of just paying them more? They’ll probably leave for a more lucrative opportunity at a start up because your company has stagnated due to throwing away all of your extra cash. As far as brand image, no one cares. If you want your stock to be triple digits just split your stock. No one pays that close attention or cares enough to make them buy Pepsi instead of Coke because their stock went down. The stock price as no effect on a company at that point. They don’t need to raise money by selling securities, so it doesn’t matter if it’s $2 or $2000.
What this leaves you with is the very obvious conclusion that corporations, investment firms, executives, and board members that hold large positions in these companies benefit from the lower tax rate of qualified dividends (20% vs 37%). In the case of investment firms, this also allows a steady influx of cash for new investments that doesn’t require selling other securities that both limits growth and incurs additional tax.
Please feel free to tell me what I’m missing here. Anyone I have asked has given me a variety of these responses, but has yet to substantiate any of them past the surface level BS.
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