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Why Companies Pay Dividends

By Motley Fool Staff - May 1, 2016 at 11:00AM

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How paying shareholders a slice of profit can be a company’s smartest financial move.

In this segment from the Industry Focus: Tech podcastDylan Lewis and Sean O'Reilly explain what motivates some companies to pay out a percentage of their profits to shareholders as dividends, rather than plow it into research and development, marketing, or other activities.

A full transcript follows the video.

This podcast was recorded on April 15, 2016. 

Dylan Lewis: I do think, one of the things that tends to get overlooked with capital allocation, and the theory with dividends is that, by issuing dividends, becoming a dividend payer, you are essentially saying, "We're doing this, every quarter, every year, whatever the term is," and you're kind of locked into that. And that attracts a certain type of investor. When you commit to a dividend program, you're going to get people who are income-oriented, and you're signaling to people, in a lot of ways, that they can set and forget their investments. They'll collect that yield over time --

Sean O'Reilly: And not only that, but they're saying, "We think our shareholders can do better with this money, even after paying taxes on those dividends, than we can, at least this chunk."

Lewis: Yeah. And I think it does offer the stock a lot of stability, because people are buying and holding.

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