Question about dividends and giant companies [duplicate]
"Dividends are a way of distributing profits from operating a business to the business owners. Why would you call it ""wasting money"" is beyond me. Decisions about dividend distribution are made by the company based on its net revenue and the needs of future capital. In some jurisdictions (the US, for example), the tax policy discourages companies from accumulating too much earnings without distributing dividends, unless they have a compelling reason to do so. Stock price is determined by the market. The price of a stock is neither expensive nor cheap on its own, you need to look at the underlying company and the share of it that the stock represents. In case of Google, according to some analysts, the price is actually quite cheap. The analyst consensus puts the target price for the next 12 months at $921 (vs. current $701)." I see a false assumption that you are making.  (Almost always) When you buy stock the cash you spend does not go to the company. Instead it goes to someone else who is selling their shares.  The exception to this is when you buy shares in an IPO.  Those of us who have saved all our lives for retirement want income producing investments once we retire. (Hopefully) We have saved up quite a bit of money. To have us purchase their stock companies have to offer us dividends.
Small companies need not pay out heft dividends. It makes much more sense to invest it directly in to the company to build  a stronger company and produce future results. For example just say Mike see's a company called Milk Inc.  Milk inc is doing very well and for the last three year's the amount the profits are increasing by has been going up by 10% the company is still small and doesn't do dividends. Mike see's opportunity and snatches up 1000 at 2.20 , He knows this company does not pay dividends. 10 years pass and this company is absolutely booming  profits are still going up the company has decided to start paying hefty dividends as it no longer needs as much money to invest in it's growth. Shares are now valued at 6.80 . Mike banks. "As Dheer pointed out, the top ten mega-cap corporations account for a huge part (20%) of your ""S&P 500"" portfolio when weighted proportionally. This is one of the reasons why I have personally avoided the index-fund/etf craze -- I don't really need another mechanism to buy ExxonMobil, IBM and Wal-Mart on my behalf. I like the equal-weight concept -- if I'm investing in a broad sector (Large Cap companies), I want diversification across the entire sector and avoid concentration. The downside to this approach is that there will be more portfolio turnover (and expense), since you're holding more shares of the lower tranches of the index where companies are more apt to churn. (ie. #500 on the index gets replaced by an up and comer). So you're likely to have a higher expense ratio, which matters to many folks." If you have a public company and shareholder A owns 25% and shareholder B owns 25%, and lets say the remaining 50% is owned by various funds/small investors.   Say profits are 100mil, and a dividend is payed. Say 50 mil worth is payed out as dividend and 30 mil is kept as retained earnings for future investment. Can the remaining 20 mil be distributed to shareholders A and B, so that they both get 10mil each? Can certain shareholders be favored and get a bigger cut of profits than the dividends pay out is my question basically. "Most companies are taken over. One can reasonably guess that company X will be taken over for a price P, at some future point in time. Then the company has a value today, that is less than price P, by a large enough margin so that the investor will likely ""make out"" when the company finally is taken over at some unknown point in time. The exception is a company like Microsoft or Apple that basically grow too large to be taken over. But then they eventually start paying dividends when they become ""mature."" Again, the trick, during the non-dividend paying period (e.g. ten or fifteen years ago) is to guess what dividends will be paid in some future time, and price the stock low enough today so that it will be worthwhile for the buyer." Best as i can tell, the simple answer is: the smartest approach to investing for dividends is to pick a company that is, has, and will continue to make a solid profits. there are lots of them out there. specifically, companies with no debt, a history of long-term and steady growth and a stable market share will, almost always recoup any drop in stock valuation due to a dividend payout...and usually in short order. this is why dividends were created...as a mechanism for distributing profits back to investor without diminishing thier stake in the company. the trick then, is to find such companies with the best ratio between stock price and dividend payout. and again, there are a lot of good options out there.  All the trepidation is justified however, as many unscrupulous companies will try to pull investors in with high dividends as a means to simply generate capital. these companies have few of the quality attributes mentioned above. instead, High debt, fluctuating or negative profits, minimal market share or diminishing growth present a very risky long term play and will be avoided by this conservative investor. Depends on if the stock pays a dividend or not. Some companies in their early years may choose to not pay dividends. Your calculations are off as the dividend stated is annual that you'd have to divide by 4 to get what the quarterly amount would be and there can be variances as Ellison's compensation package may well include options so that the number of shares he owns could fluctuate over the course of a year. Nominal. What you say is true, but I'm guessing it would be too complicated to modelate. Plus, a shareholder of a very large company would not necessarily experience said loss if he/she sells the stock in small chunks at a time. You have a misunderstanding about what it is. Absent differential tax treatment buybacks and dividens are the exact same. period. You're saying it yourself, not buying back stock so they can pay out dividends. What the impetus might be is irrelevant. Dividends are a use of funds competing equally with investments or higher salary. "Thanks for your reply. I think a lot of people are confused when talking about ownership, and I think it is a definitional issue.   When a company issues stock (the first time or anytime), what they are doing is ""selling"" the right to a percentage of the dividend. They are not actually selling parts of the company to you. Everyone thinks this way though, and that has to do with the Chicago School economists who perpetuated their ideas of ownership which is what everyone know thinks is the case. This way of thinking about corporations and ownership is just wrong (not ethically), just erroneous.   As I stated before, Lynn Stout of Cornell University explains this really well. I would encourage anyone to read more about it." Are we still discussing Amazon? Their net income has hovered around $1 billion per year for the past three years.  If that's profit-free, sign me up. They do have very thin margins, but it's clearly by design. And you really do have to take into account the massive volume of sales they do.  Still, like you, I'm curious to see if they'll ever turn into a mature, dividend-paying company. For example, it's been interesting to see Microsoft hike their dividend to a fairly competitive level while Yahoo resists being seen as anything other than a growth story. "This answer will expand a bit on the theory. :) A company, as an entity, represents a pile of value. Some of that is business value (the revenue stream from their products) and some of that is assets (real estate, manufacturing equipment, a patent portfolio, etc). One of those assets is cash. If you own a share in the company, you own a share of all those assets, including the cash. In a theoretical sense, it doesn't really matter whether the company holds the cash instead of you. If the company adds an extra $1 billion to its assets, then people who buy and sell the company will think ""hey, there's an extra $1 billion of cash in that company; I should be willing to pay $1 billion / shares outstanding more per share to own it than I would otherwise."" Granted, you may ultimately want to turn your ownership into cash, but you can do that by selling your shares to someone else. From a practical standpoint, though, the company doesn't benefit from holding that cash for a long time. Cash doesn't do much except sit in bank accounts and earn pathetically small amounts of interest, and if you wanted pathetic amounts of interests from your cash you wouldn't be owning shares in a company, you'd have it in a bank account yourself. Really, the company should do something with their cash. Usually that means investing it in their own business, to grow and expand that business, or to enhance profitability. Sometimes they may also purchase other companies, if they think they can turn a profit from the purchase. Sometimes there aren't a lot of good options for what to do with that money. In that case, the company should say, ""I can't effectively use this money in a way which will grow my business. You should go and invest it yourself, in whatever sort of business you think makes sense."" That's when they pay a dividend. You'll see that a lot of the really big global companies are the ones paying dividends - places like Coca-Cola or Exxon-Mobil or what-have-you. They just can't put all their cash to good use, even after their growth plans. Many people who get dividends will invest them in the stock market again - possibly purchasing shares of the same company from someone else, or possibly purchasing shares of another company. It doesn't usually make a lot of sense for the company to invest in the stock market themselves, though. Investment expertise isn't really something most companies are known for, and because a company has multiple owners they may have differing investment needs and risk tolerance. For instance, if I had a bunch of money from the stock market I'd put it in some sort of growth stock because I'm twenty-something with a lot of savings and years to go before retirement. If I were close to retirement, though, I would want it in a more stable stock, or even in bonds. If I were retired I might even spend it directly. So the company should let all its owners choose, unless they have a good business reason not to. Sometimes companies will do share buy-backs instead of dividends, which pays money to people selling the company stock. The remaining owners benefit by reducing the number of shares outstanding, so they own more of what's left. They should only do this if they think the stock is at a fair price, or below a fair price, for the company: otherwise the remaining owners are essentially giving away cash. (This actually happens distressingly often.) On the other hand, if the company's stock is depressed but it subsequently does better than the rest of the market, then it is a very good investment. The one nice thing about share buy-backs in general is that they don't have any immediate tax implications for the company's owners: they simply own a stock which is now more valuable, and can sell it (and pay taxes on that sale) whenever they choose." Imagine you have a bank account with $100 in it. You are thinking about selling this bank account, so ask for some bids on what it's worth. You get quotes of around $100. You decide to sell it, but before you do, you take $50 out of it to have in cash. Would you expect the market to still pay $100 for the account? The dividend is effectively the cash being withdrawn. The stock had on account a large amount of cash (which was factored into it's share price), it moved that cash out of it's account (to its shareholders), and as a result the stock instantly becomes priced lower as this cash is no longer part of it, just as it is in the bank account example. I'm fairly convinced there is no difference whatsoever between dividend payment and capital appreciation.  It only makes financial sense for the stock price to be decreased by the dividend payment so over the course of any specified time interval, without the dividend the stock price would have been that much higher were the dividends not paid.  Total return is equal. I think this is like so many things in finance that seem different but actually aren't. If a stock does not pay a dividend, you can synthetically create a dividend by periodically selling shares.   Doing this would incur periodic trade commissions, however.  That does seem like a loss to the investor.  For this reason, I do see some real benefit to a dividend.  I'd rather get a check in the mail than I would have to pay a trade commission, which would offset a percentage of the dividend. Does anybody know if there are other hidden fees associated with dividend payments that might offset the trade commissions?  One thought I had was fees to the company to establish and maintain a dividend-payment program.  Are there significant administrative fees, banking fees, etc. to the company that materially decrease its value?  Even if this were the case, I don't know how I'd detect or measure it because there's such a loose association between many corporate financials (e.g. cash on hand) and stock price. Large companies whose shares I was looking at had dividends of the order of ~1-2%, such as 0.65%, or 1.2% or some such. My savings account provides me with an annual return of 4% as interest. Firstly inflation, interest increases the numeric value of your bank balance but inflation reduces what that means in real terms. From a quick google it looks like inflation in india is currently arround 6% so your savings account is losing 2% in real terms. On the other hand you would expect a stable company to maintain a similar value in real terms. So the dividend can be seen as real terms income. Secondly investors generally hope that their companies will not merely be stable but grow in value over time. Whether that hope is rational is another question.  Why not just invest in options instead for higher potential profits? It's possible to make a lot of money this way. It's also possible to lose a lot of money this way. If your knowlage of money is so poor you don't even understand why people buy stocks there is no way you should be going near the more complicated financial products. Gotcha.  So they essentially are just your normal dude that puts money in the stock market, just bigger money.  For example, I may buy a few stocks in Apple in the hopes that I can exit at a higher price and have higher dividends.  Those big investors are doing the same thing for the 2 benefits I said earlier, but they have more money to invest.  Or do they get other benefits that us average stock holders dont get?  Thanks for the first reply.