Why Do Some Companies Pay a Dividend, While Other Companies Do Not?

This article discusses the reasons why certain firms choose to issue dividends and why certain corporations choose not to pay dividends. It also explores the Berkshire Hathaway policy and the Modigliani-Miller principle on dividend strategy.

Contents
INTRODUCTION:....................................................................................................................................2
Why certain Firms Like to Issue Dividends:........................................................................................2
Why certain Corporations Choose Not to Pay Dividends:..................................................................3
Berkshire Hathaway Policy:...............................................................................................................3
Modigliani-Miller Principle on Modigliani Dividend Strategy:...........................................................3
REFERENCE:...........................................................................................................................................4

INTRODUCTION:
Dividends are corporate income transferred to stakeholders by businesses. They may be in the
means of exchange deposits, inventory stocks, or other assets. Dividends may be awarded over
different periods of time and levels of payment. (Investopedia, 2019)
There are a numerous reasons why a firm may choose to transfer some of its income as dividends,
and a number of other reasons why it might wish to reinvest all of its income back into the
enterprise.
Why certain Firms Like to Issue Dividends:
This is why granting dividends can be a wise thing for a prosperous business with steady income that
need not reinvest as much in it. Several shareholders like the constant dividend-related revenue, so
they are more inclined to purchase the inventory of that firm. (Investopedia, 2019)

Also, shareholders see a dividend payment as a symbol of the power of a firm and a hint that
leadership has favourable prospects for future income, making the inventory more appealing again.
A higher demand for the inventory of a firm will boost its cost.
Why certain Corporations Choose Not to Pay Dividends:
With Their Earnings, a business that continues to increase quickly will generally not pay dividends, as
it wishes to spend as much as necessary in further development. (Investopedia, 2019)
Even a prosperous company that thinks it will do a decent job of raising its worth (and thus a better
job of raising its share price) will choose not to pay dividends by reinvesting its income. Corporations
that don't pay dividends may use the cash to begin a fresh venture, obtain fresh property, take back
a few of their shares, or even purchase out a new enterprise.
Berkshire Hathaway Policy:
Berkshire Hathaway (BRK-A, BRK-B) does not pay a dividend as its chairperson and CEO, Warren
Buffett, thinks that allocating the income of the organization in other respects would be more useful.
Buffett chooses, in specific, to reinvest earnings in items that enable his business to enhance its
effectiveness, grow its scope, generate fresh products and services, as well as enhance current ones,
and thus distinguish it from rivals. Like many enterprise rulers, Buffett believes that returning to his
enterprise gives investors further long-term importance than charging them straight, as the
economic achievement of the firm benefits stakeholders with greater inventory prices.
(Investopedia, 2019)
Modigliani-Miller Principle on Modigliani Dividend Strategy:
Miller Concept is a significant advocate of the concept of' Dividend Insignificance.' Stakeholders do
not give any significance to a corporation's earnings record as per this notion and therefore earnings
are meaningless in measuring a corporation's rating. This concept contrasts directly with the concept
of' Dividend Importance,' which considers earnings essential in a corporation's rating.
(eFinanceManagement.com, 2019)
Whether or not a business pays a dividend, the shareholders are sufficiently prepared to make their
own money flows from the shares based on their Modigliani-Miller Theory on Dividend Strategy for
the money. If the shareholder needs more money than the dividend he earned, to offset the loss, he
can always sell a portion of his investments. Likewise, if a shareholder has no current money
obligation, the dividend earned can always be reinvested in the inventory.

REFERENCE:
eFinanceManagement.com. (2019). MM Theory on Dividend Policy focusing on 'Irrelevance of
Dividend'. [online] Available at: https://efinancemanagement.com/dividend-decisions/modigliani-
miller-theory-on-dividend-policy [Accessed 3 Jul. 2019].
Investopedia. (2019). Dividend Definition. [online] Available at:
https://www.investopedia.com/terms/d/dividend.asp [Accessed 3 Jul. 2019].
Investopedia. (2019). Why Do Some Companies Pay a Dividend, While Other Companies Do Not?.
[online] Available at: https://www.investopedia.com/ask/answers/12/why-do-some-companies-pay-
a-dividend.asp [Accessed 3 Jul. 2019].
Investopedia. (2019). Why Doesn't Berkshire Hathaway Pay a Dividend?. [online] Available at:
https://www.investopedia.com/ask/answers/021615/why-doesnt-berkshire-hathaway-pay-
dividend.asp [Accessed 3 Jul. 2019].