You may ask yourself, “How does a company benefit from paying out dividends, hefty amounts actually, instead of retaining this amount?”
The banks listed on the Nairobi Securities Exchange PLC released their FY 2023 results last month, and investors of these institutions were eagerly anticipating the dividend amounts they would receive. Generous dividends were announced, much to the delight of investors.
While this is music to the investors’ ears, it’s common to ponder: “I can see how an investor benefits from a dividend payout, but I do not understand the value a company gets from paying these dividends. Isn’t this a loss for them?” Well, here’s how companies gain from paying out dividends:
Increased Stock Demand
Dividend-paying stocks often attract income-oriented investors seeking steady income streams. By distributing dividends, companies can broaden their investor base, potentially driving up demand for their stock among income-focused investors.
Investor Confidence
Dividends serve as a method for companies to directly share their profits with shareholders. By distributing dividends, companies acknowledge shareholder investment and loyalty, fostering a sense of trust among investors and potentially attracting new ones.
Enhanced Reputation
Consistent dividend payments can indicate to investors that the company is financially healthy and generating substantial profits. This can strengthen the company’s reputation and potentially lead to an increase in its stock price.
Better Access to Capital
Consistent dividend payments can improve a company’s access to capital in the future. By establishing a track record of profitability and shareholder returns, companies may find it easier to raise funds through debt or equity offerings when needed for expansion or strategic initiatives.
Mitigation of Overinvestment
Paying dividends can prevent management from overinvesting in projects with diminishing returns. Instead of hoarding excess cash for potentially wasteful investments, companies returning capital to shareholders are incentivized to pursue only the most promising opportunities for growth.
