Low Dividend Payout: Real World Factors

Low Dividend Payout: Real World Factors
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  • 0:03 Low Dividends
  • 1:01 Taxes
  • 1:26 Flotation Costs
  • 1:47 Dividend Restrictions
  • 2:07 Investor Benefits
  • 2:31 Lesson Summary
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Lesson Transcript
Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

After reading this lesson, you will see why some companies prefer to give low dividend payouts instead of higher dividend payouts. Learn why this can benefit both the business and the investor.

Low Dividends

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.

Taxes

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.

Flotation Costs

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.

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