Understanding Dividend Payments: Why Some Companies Don't Pay

If you have been in the stock market for long, you will realize that some companies pay dividends while other companies do not. Some investors like to receive dividends and they might wonder why certain companies do not pay them. Here are a few things to consider about why some companies do not pay dividends.

What Are Dividends?

In order to understand why some companies do not pay dividends, it is important for you to understand what a dividend is. When a company is profitable, they can choose to use their profit in a few different ways. One way that they can use the profit is to distribute part of it to the shareholders. This is known as a dividend. If a company does not distribute this money is the form of dividends, they can use it to reinvest in themselves. Therefore, when a company chooses to issue dividends, they are essentially forgoing other opportunities that they might be able to pursue if they did not issue them. 

Growth

One of the primary reasons that certain companies do not issue dividends is that they want to grow the company. Instead of distributing money to the shareholders, they reinvest that money back into growth for the company. By putting money into expansion, the company can continue to grow and raise the share value for the investors. Many companies today value growth over other things that were previously considered to be important.

Hard Times

Another reason that some companies do not issue dividends is because they are not financially stable. They might be going through a hard time in their particular industry. When they are going through a dry spell, they do not necessarily have extra money to pass around to the shareholders. Because of this, they may not be able to afford to issue a dividend at the current time. In the future, they might decide to issue dividends again.

Tax Implications

As an investor, you also want to be aware of the tax implications of this decision. When a company decides to reinvest money back into themselves, there will be more money that will not make its way into the hands of the government. When a company issues dividends, the company has to pay taxes on the money and then the shareholders have to pay taxes on money. However, when a company invests directly in themselves, they are only paying taxes on this money once. This saves money that would be given to the government and allows it to be put into the growth of the business.

By doing this, the company is also going to potentially be able to help your tax situation as well. When you receive dividends, you are most likely going to have to pay taxes on the dividends at your marginal tax rate. However, when you pay capital gains tax on the increase in the share price, you will potentially be able to pay 15 percent for the long-term capital gains.