Reviewed by Charles Potters
Dividends are after-tax corporate income that companies pass on to their shareholders. They can be in the form of cash payments, shares of stock, or other property.
Dividends may be issued at a frequency chosen by a company, although many companies pay dividends quarterly and in amounts that increase over time.
There are a number of reasons why a corporation may choose to pay shareholders dividends, and several other reasons why it might prefer to reinvest all of its earnings back into the company.
Key Takeaways
- Dividends are payments from corporate net income that companies pass on to their shareholders.
- Paying dividends sends a message about a company’s future prospects and performance.
- Its willingness and ability to pay steady dividends over time provide a solid demonstration of a company’s financial strength.
- A company that is still growing rapidly usually won’t pay dividends because it wants to invest as much as possible into further growth.
- Mature firms that believe they can increase value by reinvesting their earnings may choose not to pay dividends.
Why Some Companies Issue Dividends
Here’s why issuing dividends can be a good idea for a mature company with stable earnings that doesn’t need to reinvest as much in itself:
- Many investors like the steady income associated with dividends, so they will be more likely to buy that company’s stock.
- Investors also see a dividend payment as a sign of a company’s financial strength and management’s positive expectations for future earnings, which again makes the stock more attractive. Greater demand for a company’s stock will increase its price.
- Increasing dividend amounts from companies with a history of continuous dividend payments are also highly appealing to investors.
Examples of companies that pay dividends include Apple (AAPL), Coca-Cola (KO), McDonald’s (MCD), Merck (MRK), Microsoft (MSFT), Occidental Petroleum (OXY), Wells Fargo (WFC), and Verizon (VZ).
Important
One of the simplest ways for companies to foster goodwill among their shareholders, drive demand for the stock, and communicate financial well-being and shareholder value is by paying dividends.
Why Some Companies Do Not Issue Dividends
On the other hand, some companies decide that the money they’ve earned is needed elsewhere:
- Young, fast-growing companies typically won’t make dividend payments. That’s because it’s fiscally shrewder to reinvest the cash back into operations during pivotal growth stages.
- Even well-established companies might decide to reinvest their earnings to fund new initiatives, acquire other companies, or pay down debt. All of these activities tend to spike share prices.
- Companies often reinvest earnings in lieu of making dividend payments to avoid the potentially high costs associated with issuing new stock.
In addition, the choice not to pay dividends may be more beneficial to investors, from a tax perspective:
Non-qualified (ordinary) dividends are taxable to investors as ordinary income. This means that an investor’s tax rate on dividends is the same as their marginal tax rate which can be as high as 37%.
Qualified dividends are taxed at the long-term capital gains rates, either 0%, 15%, or 20%. What you pay depends on your marginal income tax bracket. (Take a look at the table in the next section to determine the rate that might apply.)
Does Amazon Pay Dividends?
Some large and notable companies do not issue dividends. For example, Amazon has never declared or paid a cash dividend on its common stock. Other companies that have not paid dividends include Biogen and Tesla.
Long-Term Capital Gains Tax Rates on Qualified Dividends
The table below shows the maximum amounts of income that determine the long-term capital gains tax rate that recipients of qualified dividends would pay, as of tax years 2024 and 2025. Income above the maximum amount for the 15% rate for each filing status would result in the 20% rate.
Where Can I Find the Total Amount of My Qualified Dividends?
You can find your ordinary and qualified dividend amounts on Form 1099-DIV that you’ll receive from financial institutions and companies that pay you dividends. The amount for qualified dividends in particular appears in box 1b.
Do Companies Ever Stop Paying Dividends?
Yes, companies can suspend their dividend payments. Keep in mind that dividends are not guaranteed. Companies might halt them if they’re in financial trouble, have a large, unexpected expense that must be paid, or decide to invest earnings in a project that can add to future growth.
What Company Has Paid Dividends the Longest?
A number of U.S. companies have paid dividends without stopping for many years. For example, the York Water Company has paid a dividend non-stop for over 200 years. Stanley Black and Decker has paid a dividend continuously since 1877. And Exxon-Mobil has paid a dividend no matter the difficulties since 1882.
The Bottom Line
When a company pays dividends, it returns some of its profits directly to shareholders, sending a signal to the market of stable and reliable operations.
Newer companies, or those in the technology space, often opt instead to redirect profits back into the company for growth and expansion, so they do not pay dividends. Rather, this reinvestment of retained earnings is often reflected in a rising share price and capital gains for investors.