Is it viable for a company to give out dividends to its shareholders?

  • Asked By
  • Updated On:
  • Replies:

Short Answer

Dividends issues by a company should only be undertaken unless and until they have enough profit margin. Only large-scale companies can afford to issue dividends with retaining investors. For others, looking into other schemes of rewarding investors is viable.

Detailed Answer

Profitable companies that might be listed on the stock market often reap the rewards, all thanks to their hard work, dedication, and determination in growing in the right direction. However, when you invest in a company, you do expect something in return. Based on the company, you might expect price change, growth, or even dividends.

Investors often rely on the company's performance to give them some form of return. But then you never really know whether they might give dividends or not. If you don't know what dividends are, they are a small number of profits that the company shares with its equity or stakeholders based on the number of shares held by an investor.

With that being said, let's take a closer look at the advantages and disadvantages of a company paying dividends to their investors and it viable for them to do so. Let's find out.

Advantages of paying dividends

• Investors become confident about the company and believe that the company can expand its operations and see growth. Moreover, investors tend to invest more into such companies to gain a constant profit margin.

• You tend to attract other potential investors, considering the profits you post publicly. It's quite feasible that you can get more investors and see the growth of your business simultaneously.

• The company is proving itself profitable, which allows investors and traders to trade frequently and hold on to shares, thus increasing the valuation and sustainability of the company in the stock market.

Disadvantages of paying dividends

• The company would run out of cash quickly. It's a notion where you would have to pay lakhs of investors invested in your company, and paying even a small sum of 10-15 rupees per share would lead to crores in dividends which may or may not be viable.

• The money given out as dividends is taxable, and this criterion has to be fulfilled. It's an additional burden to the companies of fulfilling their tax requirements based on the dividends issued.

• If the company fails to pay dividends for one year and does the next year, there is uncertainty in the stock market. Dividend investors might look elsewhere, and investors might not believe in your company for investing. Hence, it's a better option to not pay at all or pay in really small sums for consistency.

Bottom line

Paying dividends to investors is a sign that the company acknowledges the investor's belief in the company. It's a sign of gratitude, and they are sharing their profits with their investors. However, it's not viable that every company has to do so. Suppose you have enough profits even after paying dividends, then its fine. If not, then it's better to rewards investors in other ways wherein you aren't losing half of your profits in dividends alone.

Tagged With: dividendsinvestorsstock marketcompany diveidends
Categories: Stock Market
Ask Your Query for FREE, Get quick answers from our FINTRAKK community!
Discussion (0)
Related FAQs
What are best stocks for college students to invest in India?

The best stocks for college students to invest in in India are those with strong fundamentals and high dividend yields, such as Reliance Ltd., ITC Ltd., and Infosys Ltd.

What are 7 important questions to ask before you buy a stocks?

Undertaking fundamental analysis and proper research is essential before investing in any particular stock. Apart from this, you should also consider asking seven key questions like 'What does the company do', 'How is it placed among its peers', 'How is the management of the company', etc before investing in it.

What are Index Funds? Meaning, Advantages, Review, Taxation

Index funds are mutual funds in which investment are made in the stocks of Index they track such as Nifty, Sensex according to its composition and weightage of the index.

How to know which stocks to trade in with so many companies listed?

One can either invest in bluechip companies or research extensively on the companies they feel would give returns. It also comes down to the type of investment they are ready to make. Hence, figuring out the different companies could take time, experience, and research.

Why did the Paytm IPO did not perform well after listing?

One97 Communications, the parent company of Paytm came up with the largest IPO in Indian history but failed to perform well. Firstly the IPO was too big for the retail investors to digest. Then the valuations were extremely high which led to the HNIs and Institutions avoiding the issue. All together the overhype in social media led to massive losses for the retail investors as the stock fell almost 40% in two trading sessions.

What is Mirae Asset FANG Plus ETF?

The Mirae Asset NYSE FANG Plus ETF Fund is a good option for Investors who want foreign exposure. The Equity allocation is very concentrated to just 10 stocks which makes this ETF very volatile and risky. This ETF consists of the top 10 stocks in their respective sectors mostly TECH, like Amazon, Netflix. Facebook, etc. Hence Investors with high-risk tolerance and a long time period should consider this fund.

Which is the best stock broker for beginners in India?

Discount brokers have gained a lot of popularity in the past couple of years. Zerodha is currently India's largest and most trusted discount broker which is also the best option for beginners. It has all the necessary qualities required for a good broker like low commissions, low-maintenance charges, high-quality trading terminal, etc.

What is intrinsic value of stock and how it is calculated?

Intrinsic value basically means real stock value and can be calculated using these three ways:

  • Discounted cash flow analysis
  • Analysis based on financial metric
  • Dividend Discount method
How Debt Funds Work?

Debt funds are mutual funds managed by professionals with their money invested in high-rated securities. Just like you lend money to the bank through fixed deposit or while purchasing the bond, a certificate is issued by the borrower. Debt funds also work on the similar concept.

Which companies have consistently offered higher dividends throughout the years?

Companies such as ITC, GAIL, Hindustan Zinc, Oil India, and others have consistently provided higher dividends, all thanks to their profits and the overall growth they might have had despite incurring some losses during the process.