Why is it rational to pay out a dividend?
The main reason, as far as I can see, is that the dividends are payments with which the shareholders may do what they want. Capital that the company has no use for does not make a significant positive return on investment, as you pointed out, yes the company could accrue interest, but that is not going to make the company large sums of cash. While the company may be great at making shoes - maybe even the best in the world - doesn't mean they are good investors. Sure they could dabble at using their capital to invest in other equities, but they don't, because they just want to focus on making shoes. If the dividend goes to the investors, they can do what they wish, be it reinvest in the company, or invest elsewhere. Other companies that may make good use of the capital, and create significant returns on it are one such example. That is the rational answer, beyond that, one of the main reasons is that people like the feeling of receiving dividends - it might not be the answer you are looking for, but many people prefer companies that pay dividends for no rational reason over companies which grow their asset value. First, you need to understand that not  every investor's goals are the same. Some investors are investing for income. They want to invest in a profitable company and use the profit from the company as income. If that investor invests only in stocks that do not pay a dividend, the only way he can realize income is to sell his investment. But he can invest in companies that pay a regular dividend and use that income while keeping his investment intact.  Imagine this: Let's say I own a profitable company, and I offer to sell you part ownership in that company. However, I tell you this upfront: no matter how much profit our company makes, you will never get a penny from me. You will be getting a stock certificate - a piece of paper - and that's it. You can watch the company grow, and you can tell yourself you own it, but the only way you will personally benefit from your investment would be to sell your piece to someone else, who would also never see a penny in profit. Does that sound like a good investment? The fact of the matter is, stocks in companies that do not distribute dividends do have value, but this value is largely based on the potential of profits/dividends at some point in the future. If a company vows never ever to pay dividends, why would anyone invest?  An investment would be more of a donation (like Kickstarter) at that point.  A company that pays dividends is possibly past their growth stage. That doesn't necessarily mean that they have stopped growing altogether, but remember that an expansion project for any company does not automatically yield a good result. If a company does not have a good opportunity currently for a growth project, I as an investor would rather get a dividend than have the company blow all the profit on a ill-fated gamble. Actually, share holder value is is better maximised by borrowing, and paying dividends is fairly irrelevant but a natural phase on a mature and stable company. Company finance is generally a balance between borrowing, and money raised from shares. It should be self evident with a little thought that if not now, then in the future, a company should be able to create earnings in excess of the cost of borrowing, or it's not a very valuable company to invest in! In fact what's the point of borrowing if the cost of the interest is greater than whatever wealth is being generated? The important thing about this is that money raised from shares is more expensive than borrowing. If a company doesn't pay dividends, and its share price goes up because of the increasing value of the business, and in your example the company is not borrowing more because of this, then the proportion of the value of the company that is based on the borrowing goes down. So, this means a higher and higher proportion of the finance of a company is provided by the more expensive share holders than the less expensive borrowing, and thus the company is actually providing LESS value to share holders than it might. Of course, if a company doesn't pay a dividend AND borrows more, this is not true, but that's not the scenario in your question, and generally mature companies with mature earnings may as well pay dividends as they aren't on a massive expansion drive in the same way. Now, this relative expense of share holders and borrowing is MORE true for a mature company with stable earnings, as they are less of a risk and can borrow at more favourable rates, AND such a company is LIKELY to be expanding less rapidly than a small new innovative company, so for both these reasons returning money to share holders and borrowing (or maintaining existing lending facilities) maintains a relatively more efficient financing ratio. Of course all this means that in theory, a company should be more efficient if it has no share holders at all and borrows ALL of the money it needs. Yes. In practise though, lenders aren't so keen on that scenario, they would rather have shareholders sharing the risk, and lending a less than 100% proportion of the total of a companies finance means they are much more likely to get their money back if things go horribly wrong. To take a small start up company by comparison, lenders will be leary of lending at all, and will certainly impose high rates if they do, or ask for guarantors, or demand security (and security is only available if there is other investment besides the loan). So this is why a small start up is likely to be much more heavily or exclusively funded by share holders. Also the start up is likely not to pay a dividend, because for a start it's probably not making any profit, but even if it is and could pay a dividend, in this situation borrowing is unavailable or very expensive and this is a rapidly growing business that wants to keep its hands on all the cash it can to accelerate itself. Once it starts making money of course a start up is on its way to making the transition, it becomes able to borrow money at sensible rates, it becomes bigger and more valuable on the back of the borrowing. Another important point is that dividend income is more stable, at least for the mature companies with stable earnings of your scenario, and investors like stability. If all the income from a portfolio has to be generated by sales, what happens when there is a market crash? Suddenly the investor has to pay, where as with dividends, the company pays, at least for a while. If a company's earnings are hit by market conditions of course it's likely the dividend will eventually be cut, but short term volatility should be largely eliminated. It comes down to the practical value of paying dividends. The investor can continually receive a stream of income without selling shares of the stock. If the stock did not pay a dividend and wanted continual income, the investor would have to continually sell shares to gain this stream of income, incurring transaction costs and increased time and effort involved with making these transactions. The real value of a share of stock is the current cash value of all dividends the owner will receive, plus the current cash value of the final liquidation if any.  Since people with different needs may judge the current cash value of an income stream differently, there would be a market basis for people to buy and sell stocks even if everyone could predict all future payouts perfectly. If shareholders knew that a company wouldn't pay any dividends until it was liquidated in the year 2066, whereupon it would pay $2000/share, then each share would in 2016 effectively be a fifty-year zero-coupon bond with a $2000 maturity value.  While some investors would be willing to trade in such an instrument, the amount of money a company could charge for such an instrument would be far lower than the money it could charge for one with payouts that were more evenly distributed through time. Since the founders of most companies want their companies to be around for a long time, that would mean that shareholders would have no expectation of their shares ever yielding anything of value within any foreseeable timeframe.  Even those who would be more interested in share-price appreciation than dividends wouldn't be able to see share prices rise if there wasn't any likelihood of the stock being bought by someone who wanted the dividends. Firstly, investors love dividend paying company as dividends are proof of making profit (sometimes dividend can be paid out of past profits too)   Secondly, investor cash in hand is better than potential earnings by the company by way of interest. Investor feels good to redeploy received cash (dividend) on their own   Thirdly, in some countries dividend are tax free income as tax on dividends has already been paid. As average tax on dividend is lower than maximum marginal tax; for some investor it generates extra post tax income   Fourthly, dividend pay out ratio of most companies don't exceed 30% of available fund for paying (surplus cash) so it is seen as best of both the world Lastly, I trust by instinct a regular dividend paying company more than not paying one in same sector of industry Paying out dividends and financing new projects with debt also lessens the agency problem. The consequences of a failed project are greater when debt is used, so the manager now has a greater incentive to see that the project is a success. This, in addition to the paid divided is a benefit to the shareholder. If equity wasn't paid out and instead used for the project then the manager may not be so interested in its success. And if it's a failure then the shareholders are worse off.
Imagine a stock where the share price equals the earnings per share.  You pay say $100 for a share. In the next year, the company makes $100 per share. They can pay a $100 dividend, so now you have your money back, and you still own the share. Next year, they make $100 per share, pay a $100 dividend, so now you have your money back, plus $100 in your pocket, plus you own the share. Wow. What an incredible investment. "Dividend-paying securities generally have predictable cash flows. A telecom, electric or gas utility is a great example. They collect a fairly predictable amount of money and sells goods at a fairly predictable or even regulated markup. It is easy for these companies to pay a consistent dividend since the business is ""sticky"" and insulated by cyclical factors. More cyclic investments like the Dow Jones Industrial Average, Gold, etc are more exposed to the crests and troughs of the economy. They swing with the economy, although not always on the same cycle. The DJIA is a basket of 30 large industrial stocks. Gold is a commodity that spikes when people are faced with uncertainty. The ""Alpha"" and ""Beta"" of a stock will give you some idea of the general behavior of a stock against the entire market, when the market is trending up and down respectively." Remember that long term appreciation has tax advantages over short-term dividends. If you buy shares of a company, never earn any dividends, and then sell the stock for a profit in 20 years, you've essentially deferred all of the capital gains taxes (and thus your money has compounded faster) for a 20 year period. For this reason, I tend to favor non-dividend stocks, because I want to maximize my long-term gain. Another example, in estate planning, is something called a step-up basis: "This question is predicated on the assumption that investors prefer dividends, as this depends on who you're speaking to.  Some investors prefer growth stocks (some which don't pay dividends), so in this case, we're covering the percent of investors who like dividend paying stocks. It depends on who you ask and it also depends on how self-aware they are because some people may give reasons that make little financial sense.  The two major benefits that I hear are fundamentally psychological: Dividends are like mini-paychecks.  Since people get a dopamine jolt from receiving a paycheck, I would predict the same holds true for receiving dividends.  More than likely, the brain feels a reward when getting dividends; even if the dividend stock performs lower than a growth stock for a decade, the experience of receiving dividends may feel more rewarding (plus, depending on the institution, they may get a report or see the tax information for the year, and that also feels good). Some value investors don't reinvest dividends, as they believe the price of the stock matters (stocks are either cheap or expensive and automatic reinvestment to these investors implies that the price of a stock doesn't matter), so dividends allow them to rebuild their cash after a buy.  They can either buy more shares, if the stock is cheap, or keep the cash if the stock is expensive.  Think about Warren Buffett here: he purchased $3 billion worth of shares of Wells Fargo at approximately $8-12 a share in 2009 (from my memory, as people were shocked that be bought into a bank when no one liked banks).  Consider how much money he makes from dividends off that purchase alone and if he were to currently believe Wells Fargo was overpriced, he could keep the cash and buy something else he believes is cheaper.  In these cases, dividends automatically build cash cushions post buying and many value investors believe that one should always have cash on hand. This second point is a little tricky because it can involve risk assessment: some investors believe that high dividend paying stocks, like MO, won't experience the huge declines of indexes like the SPY.  MO routed the SPY in 2009 (29% vs. 19%) and these investors believe that's because it's yield was too desired (it feels safer to them - the index side would argue ""but what happens in the long run?"").  The problem I have with this argument (which is frequent) is that it doesn't hold true for every high yield stock, though some high yield stocks do show strong resistance levels during bear markets." There are many stocks that don't have dividends. Their revenue, growth, and reinvestment help these companies to grow, and my share of such companies represent say, one billionth of a growing company, and therefore worth more over time.  Look up the details of Berkshire Hathaway. No dividend, but a value of over $100,000. Not a typo, over one hundred thousand dollars per share. If you assume the market is always 100% rational and accurate and liquid, then it doesn't matter very much if a company pays dividends, other than how dividends are taxed vs. capital gains.  (If the market is 100% accurate and liquid, it also doesn't really matter what stock you buy, since they are all fairly priced, other than that you want the stock to match your risk tolerance).   However, if you manage to find an undervalued company (which, as an investor, is what you are trying to do), your investment skill won't pay off much until enough other people notice the company's value, which might take a long time, and you might end up wanting to sell before it happens.  But if the company pays dividends, you can, slowly, get value from your investment no matter what the market thinks.  (Of course, if it's really undervalued then you would often, but not always, want to buy more of it anyway).   Also, companies must constantly decide whether to reinvest the money in themselves or pay out dividends to owners.  As an owner, there are some cases in which you would prefer the company invest in itself, because you think they can do better with it then you can.  However, there is a decided tendency for C level employees to be more optimistic in this regard than their owners (perhaps because even sub-market quality investments expand the empires of the executives, even when they hurt the owners).   Paying dividends is thus sometimes a sign that a company no longer has capital requirements intense enough that it makes sense to re-invest all of its profits (though having that much opportunity can be a good thing, sometimes), and/or a sign that it is willing, to some degree, to favor paying its owners over expanding the business.  As a current or prospective owner, that can be desirable.   It's also worth mentioning that, since stocks paying dividends are likely not in the middle of a fast growth phase and are producing profit in excess of their capital needs, they are likely slower growth and lower risk as a class than companies without dividends.  This puts them in a particular place on the risk/reward spectrum, so some investors may prefer dividend paying stocks because they match their risk profile. "In the US, dividends are presently taxed at the same rates as capital gains, however selling stock could lead to less tax owed for the same amount of cash raised, because you are getting a return of basis or can elect to engage in a ""loss harvesting"" strategy.  So to reply to the title question specifically, there are more tax ""benefits"" to selling stock to raise income versus receiving dividends.  You have precise control of the realization of gains.    However, the reason dividends (or dividend funds) are used for retirement income is for matching cash flow to expenses and preventing a liquidity crunch.  One feature of retirement is that you're not working to earn a salary, yet you still have daily living expenses.   Dividends are stable and more predictable than capital gains, and generate cash generally quarterly.  While companies can reduce or suspend their dividend, you can generally budget for your portfolio to put a reliable amount of cash in your pocket on schedule.  If you rely on selling shares quarterly for retirement living expenses, what would you have done (or how much of the total position would you have needed to sell) in order to eat during a decline in the market such as in 2007-2008?" 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. The company gets it worth from how well it performs. For example if you buy company A for $50 a share and it beats its   expected earnings, its price will raise and lets say after a year or   two it can be worth around $70 or maybe more.This is where you can   sell it and make more money than dividends. Why do people talk about stock that pay high dividends?  Traditionally people who buy dividend stocks are looking for income from their investments. Most dividend stock companies pay out dividends every quarter ( every 90 days). If set up properly an investor can receive a dividend check every month, every week or as often as they have enough money to stagger the ex-dates. There is a difference in high $$ amount of the dividend and the yield.  A $1/share dividend payout may sound good up front, but... how much is that stock costing you? If the stock cost you $100/share, then you are getting 1% yield. If the stock cost you $10/share, you are getting 10% yield.  There are a lot of factors that come into play when investing in dividend stocks for cash flow. Keep in mind why are you investing in the first place. Growth or cash flow. Arrange your investing around your major investment goals. Don't chase big dollar dividend checks, do your research and follow a proven investment plan to reach your goals safely. While there are many very good and detailed answers to this question, there is one key term from finance that none of them used and that is Net Present Value. While this is a term generally associate with debt and assets, it also can be applied to the valuation models of a company's share price. The price of the share of a stock in a company represents the Net Present Value of all future cash flows of that company divided by the total number of shares outstanding. This is also the reason behind why the payment of dividends will cause the share price valuation to be less than its valuation if the company did not pay a dividend. That/those future outflows are factored into the NPV calculation, actually performed or implied, and results in a current valuation that is less than it would have been had that capital been retained. Unlike with a fixed income security, or even a variable rate debenture, it is difficult to predict what the future cashflows of a company will be, and how investors chose to value things as intangible as brand recognition, market penetration, and executive competence are often far more subjective that using 10 year libor rates to plug into a present value calculation for a floating rate bond of similar tenor. Opinion enters into the calculus and this is why you end up having a greater degree of price variance than you see in the fixed income markets. You have had situations where companies such as Amazon.com, Google, and Facebook had highly valued shares before they they ever posted a profit. That is because the analysis of the value of their intellectual properties or business models would, overtime provide a future value that was equivalent to their stock price at that time. "What you are describing is a very specific case of the more general principle of how dividend payments work. Broadly speaking, if you own common shares in a corporation, you are a part owner of that corporation; you have the right to a % of all of that corporation's assets. The value in having that right is ultimately because the corporation will pay you dividends while it operates, and perhaps a final dividend when it liquidates at the end of its life. This is why your shares have value - because they give you ownership of the business itself. Now, assume you own 1k shares in a company with 100M shares, worth a total of $5B. You own 0.001% of the company, and each of your shares is worth $50; the total value of all your shares is $50k. Assume further that the value of the company includes $1B in cash. If the company pays out a dividend of $1B, it will now be only worth $4B. Your shares have just gone down in value by 20%! But, you have a right to 0.001% of the dividend, which equals a $10k cash payment to you. Your personal holdings are now $40k worth of shares, plus $10k in cash. Except for taxes, financial theory states that whether a corporation pays a dividend or not should not impact the value to the individual shareholder.  The difference between a regular corporation and a mutual fund, is that the mutual fund is actually a pool of various investments, and it reports a breakdown of that pool to you in a different way. If you own shares directly in a corporation, the dividends you receive are called 'dividends', even if you bought them 1 minute before the ex-dividend date. But a payment from a mutual fund can be divided between, for example, a flow through of dividends, interest, or a return of capital. If you 'looked inside' your mutual fund you when you bought it, you would see that 40% of its value comes from stock A, 20% comes from stock B, etc etc., including maybe 1% of the value coming from a pile of cash the fund owns at the time you bought your units.  In theory the mutual fund could set aside the cash it holds for current owners only, but then it would need to track everyone's cash-ownership on an individual basis, and there would be thousands of different 'unit classes' based on timing. For simplicity, the mutual fund just says ""yes, when you bought $50k in units, we were 1/3 of the year towards paying out a $10k dividend. So of that $10k dividend, $3,333k of it is assumed to have been cash at the time you bought your shares. Instead of being an actual 'dividend', it is simply a return of capital.""  By doing this, the mutual fund is able to pay you your owed dividend [otherwise you would still have the same number of units but no cash, meaning you would lose overall value], without forcing you to be taxed on that payment. If the mutual fund didn't do this separate reporting, you would have paid $50k to buy $46,667k of shares and $3,333k of cash, and then you would have paid tax on that cash when it was returned to you. Note that this does not ""falsely exaggerate the investment return"", because a return of capital is not earnings; that's why it is reported separately.  Note that a 'close-ended fund' is not a mutual fund, it is actually a single corporation. You own units in a mutual fund, giving you the rights to a proportion of all the fund's various investments. You own shares in a close-ended fund, just as you would own shares in any other corporation. The mutual fund passes along the interest, dividends, etc. from its investments on to you; the close-ended fund may pay dividends directly to its shareholders, based on its own internal dividend policy." "Dividends telegraph that management has a longer term focus than just the end of quarter share price.  There is a committment to at least maintain (if not periodically increase) the dividend payout year over year.  Management understands that cutting or pausing dividends will cause dividend investors in market to dump shares driving down the stock price.   Dividends can have preferential tax treatment in some jurisdictions, either for an individual compared to capital gains or compared to the corporation paying taxes themselves.  For example, REITs (real estate investment trusts) are a type of corporation that in order to not pay corporate income tax are required to pay out 95% of income as dividends each year.  These are not the only type, MLP (master limited partnerships) and other ""Partnership"" structures will always have high dividend rates by design. Dividends provide cash flow and trade market volatility for actual cash.  Not every investor needs cash flow, but for certain investors, it reduces the risks of a liquidity crisis, such as in retirement.  The alternative for an investor who seeks to use the sale of shares would be to maintain a sufficient cash reserve for typical market recessions." "Let me provide a general answer, that might be helpful to others, without addressing those specific stocks. Dividends are simply corporate payouts made to the shareholders of the company.  A company often decides to pay dividends because they have excess cash on hand and choose to return it to shareholders by quarterly payouts instead of stock buy backs or using the money to invest in new projects. I'm not exactly sure what you mean by ""dividend yield traps.""  If a company has declared an dividend for the upcoming quarter they will almost always pay.  There are exceptions, like what happened with BP, but these exceptions are rare.  Just because a company promises to pay a dividend in the approaching quarter does not mean that it will continue to pay a dividend in the future.  If the company continues to pay a dividend in the future, it may be at a (significantly) different amount. Some companies are structured where nearly all of there corporate profits flow through to shareholders via dividends.  These companies may have ""unusually"" high dividends, but this is simply a result of the corporate structure.    Let me provide a quick example: Certain ETFs that track bonds pay a dividend as a way to pass through interest payments from the underlying bonds back to the shareholder of the ETF. There is no company that will continue to pay their dividend at the present rate with 100% certainty.  Even large companies like General Electric slashed its dividend during the most recent financial crisis.  So, to evaluate whether a company will keep paying a dividend you should look at the following: Update: In regards to one the first stock you mentioned, this sentence from the companies of Yahoo! finance explains the ""unusually"" dividend: The company has elected to be treated as a REIT for federal income tax purposes and would not be subject to income tax, if it distributes at least 90% of its REIT taxable income to its share holders." There can be a good reason if you own shares issued in a different country: For example, if you are in the UK and own US shares and take the dividend payments, you get some check in US dollars that you will have to exchange to UK£, which means you pay fees - mostly these fees are fixed, so you lose a significant percentage of your dividends. By reinvesting and selling shares accumlated over some years, you got one much bigger check and pay only one fee.