Amy has a master's degree in secondary education and has been teaching math for over 9 years. Amy has worked with students at all levels from those with special needs to those that are gifted.
Dividends are monies that are paid out regularly to stockholders of a company out of the company's profits. In this lesson, we will talk about low dividend payouts and how both companies and investors can benefit from this. A low dividend payout is when a company keeps the majority of its profits and reinvests it in the business and then gives out the rest as dividends. For example, if a company reinvests 60% of its profits back into the business and then pays out the rest in dividends, it has a dividend payout of 40%. If the company only keeps 10% of the profits and pays out the rest, then this company has a payout of 90%, which is high.
While some companies will pay out the majority of its profits as dividends, others choose to keep most of the profits and pay out a small portion of its profits as dividends. Also, some investors even look specifically for companies that have a low dividend payout. Let's talk about why this is so.
First, there is a tax advantage to be had by companies who reinvest the majority of company earnings. Why? This is because when companies reinvest their earnings, it becomes capital gains for them, and capital gains are taxed at a lower rate than dividends are. So, when a company has a low dividend payout, its tax liability is less. It costs the company less to have a low dividend payout than it does to have a high dividend payout.
As a company grows, it may consider issuing new stock so it can get additional funds to grow. In order to issue new stock, the company has to pay what are called flotation costs, which include legal fees, registration fees, and underwriting fees. If a company has a low dividend payout, the money it reinvests into the business can help pay these flotation costs.
Some companies purposely restrict the dividend payouts to a low rate. These companies want to keep the majority of earnings within the company to help it grow and to provide room for growth. Low dividend payouts give the company room to grow, which, in turn, can lead to more profits for the company, which, in turn, can lead to higher dividend checks for investors.
As an investor, companies that offer low dividend payouts are generally more stable, and dividends can be expected from them at either the same amount or higher. Because more money is kept within the company, if the company has a bad year, it will still have the money to pay the dividends to its investors. The dividends are not likely to stop as the company has room to grow as well as room to keep the dividend going. They have a safety net so to speak.
Let's review. Dividends are monies that are paid out regularly to stockholders of a company out of the company's profits. A low dividend payout means that a company keeps the majority of its earnings and pays out the rest of its earnings as dividends. For example, if a company kept 70% of its earnings, then it will have a 30% dividend payout. A low dividend payout benefits both the company and the investor. Here is a table listing the benefits to each:
|Benefits to company|
|Can afford flotation costs|
|Can use money to grow the business|
|Benefits to investor|
|Can expect the same or higher dividend on a regular basis|
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