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Isn't it preferable to see companies reinvest their earnings?  Or atleast, pay down their debt?
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What if a company has no debt and is in an industry where assets are really expensive? If reinvesting would mean overpaying for assets, the dividend would be better.

Besides, most companies that pay dividends are much better long-term investments than most companies that don't. That's just a statistical fact, even if I can't very well explain why.

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You care about dividends because they create an artificial bottom to where the stock could possibly dip to. As the stock price drops the dividend percentage increases so this creates a greater interest in buying the stock thus preventing it from further dropping. Its also a way of you getting a return on your investment without having to pay broker fees to sell your stock.

Case in point RCII  Rent a Center ~~ um the old Renters CHoice has never paid a dividend  so if you held this stock for the past 5 years and had you invested 10,000

according to the recent S & P report on RCII your 10k investment would be worth only 8K and you would have gotten nothing in the meantime other than the opportunity now to sell your 10k investment for only 8k now...

Had you gotten dividends say 4 dollars a year, you would have profited and made with your dividends and stock more than 10k

Also after a while the dividend pays for your investment so you then have an investment paid for by the house.

 

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If you want to increase your base of shareholders, you have to appeal to income oriented investors.
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Isn't it preferable to see companies reinvest their earnings?

It can be and is for many companies. but not all.  Simply reinvesting into something 'because you have the money' sure isn't good for many companies.  Growth should be managed at reasonable rates and within a core of competence.  When cash runs to excess, and business prospects continue to be good.  You should reward your stockholders with a dividend, not just grow the business just for the sake of it (as this often results in bad investments). 

Or at least, pay down their debt?

Again, not always.  For tax and other reasons, it can be prudent to maintain a level of debt depending on the business.  Certainly not too much debt.  So again, not all debt is bad and if its use has resulted in sustainable profits due to existing operations, then by all means pay a dividend. 

 

 

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A lot of research studies have stated that companies that pay dividends are often better long-term performers than non-dividend paying companies.  The conclusion that a lot of the researchers have come to is that if a company pays a dividend, then some of its earnings are paid out to shareholders.  That leaves less money for management to spend on whatever they want to spend it on.  This tends to focus management on investing in only the best ideas they come up with, since they have limited funds.  By only pursuing their best opportunities, then the company tends to perform at its optimum.

For a company that doesn't pay dividends, then management will often use that excess cash for a lot of purposes that do not benefit the shareholder.  Examples would be overpaying for a company they want to buy, investing in poorly thought-out ideas or poorly researched risk/reward ventures, empire building, (hiring a bunch of people to stroke their egos but do no good work for the company), or buying gold-plated faucets for the executive washroom.  

Another good thing about dividends is that they tend to preclude accounting shenanigans, or at least greatly restrict them.  If you don't pay out dividends, you can cook the books to say anything you want the books to say and nobody is the wiser.  Dividends, however, have to be paid out with real money.  If you actually have to come up with real money to pay your dividends, that means that you need to be earning real money, (as you can't pay dividends with paper profits), or you would have to borrow the money for the dividend payout, (and debt has to show up on the balance sheet and all the banks and brokerages know about it, so debt is hard to hide).  If a company pays a dividend, and has for several years, you can be reasonably assured that the company is making money, is focused on growing its business and is not engaging in too many accounting shenanigans.  Dividends don't preclude fraud and ineptness, but they make it harder to hide.

Also, as stated above, dividends can give you an income stream.  This money could be used to diversify your portfolio faster, since it is in addition to any monthly or yearly contributions to your account that you make, or could be used as an income stream after you retire, which you would otherwise have to get by selling your stocks and gradually liquidating your account.  With a portfolio of good dividend paying stocks, it is possible to live off of the dividends and never sell any stock, thus giving you the option of willing them to your kids, another relative or to charity, depending on what you want to happen to your estate after you die.   

Craig 

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