4 Ways Companies Use Dividends to Reward Shareholders

Dividend payment is one of the most apparent factors of profit sharing between a company and its shareholders. They do not only demonstrate a particular company’s appreciation of investment but also show its financial stability and health. In 2012, Apple had restructured its dividend program, which had not been present for a long time. Starting at $2.65 per share, it grew steadily. One of the reasons for such a decision is the company’s revenue increase, as its iPhone has been particularly successful. The growing dividend has had a positive impact on potential and current investors, attracting their attention and boosting confidence.

Hanlon and Sogl shed light on another example, focusing on the global financial crisis from 2008/09. One of the companies, which had been known for its payments, is Johnson and Johnson. It is reported that “Johnson & Johnson announced its dividend for 2009 in April 2009 and increased it – the 46th consecutive year it has increased its dividend” . Since the COVID-19 outbreak, Johnson and Johnson is working on a vaccine. Thus, such a decision has considerable support from both current and potential investors.

4 Ways Companies Use Dividends to Reward Shareholders

Regular Quarterly Dividends

For companies, regular, quarterly dividends are the most popular way of returning profits to shareholders. It provides a foundation for investors’ trust and grants a steady income source. Coca-Cola is known for having a solid dividend history, as it has not missed a quarter of payment since 1920 . As a result, giving dividends was significant for Coca-Cola to keep its reputation as a safe investment opportunity and to appeal to income-targeted investors .

In the first quarter of 2020, even a world pandemic and the total disbalance in the global economy did not lead to Coca-Cola’s decision to stop distributing dividends. The company paid $0.41 per share, which represents the yield of about 3.4% of its stock price at that moment. As a result, it demonstrates how companies with a strong reputation of investor trust adhere to such policy in bad and uncertain times .

It is crucial to observe that the described process involves not only a simple declaration of dividends but a careful plan to ensure the company’s stability. Companies known for their regular dividends, such as Johnson & Johnson or Procter & Gamble, have a similar pattern. They adjust the amount of payment to the shares in accordance with the earned money to maintain a sustainable ratio of about 60% of earnings in the form of dividends.

The value of such policy is best explained by Warren Buffet’s famous quote, “Our favorite holding period is forever.” In this way, companies giving regular dividends protect the interests of their shareholders by prioritizing long-term value above attempts to ensure a quick profit.

Special One-Time Dividends

Special one-time dividends are a strategy for companies to share their excess cash with their shareholders. While not the norm, it is a substantial source of income with significant positive effects on investor returns. An example of special dividends can be traced back to 2012 when Costco paid special dividends of $7 in a cost of $3 billion to the company . This action was motivated by the considerable dividend tax implications, as uncolored than $6.1 billion of the special dividends was accounted for by shareholders.

Future special dividends paid by companies seem to be a good sign of a company’s position and capacity. As shareholders tend to interpret the decision as positive, it increases the company’s position to sustain its success in the long term. For example, Microsoft’s $3 special dividend in 2004 was the largest one-time dividend in company history. It was also caused by the company’s efforts to clear some of its $56 billion excess cash .

Overall, special dividends require a long-term strategy and planning for immediate benefits. They also tend to inflate the shares’ prices as investors join in to gain the benefits. It can be summarized by the soundbite of John D. Rockefeller: “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” Special dividends offer surprisingly generous gifts with no warning or expectation of return. In the end, vast investments often follow such dividends, further supporting the company’s endeavors by establishing shareholder loyalty or attracting new ones.

Dividend Reinvestment Plans

The system called Dividend Reinvestment Plans allows shareholders to reinvest their cash dividends into more shares of the company’s stock, often without the need to pay commission fees. Such a systems help to compound returns over time, as investors incrementally increase their ownership of the company’s equity with each dividend cycle. For example, Home Depot has a DRIP feature for investors who would like to take full advantage of their dividends by turning them into more shares of stock.

One of the most practical examples of how a DRIP would benefit individuals includes PepsiCo’s ability to turn one-time investors into millionaires through its long-term dividend reinvestment plan for shareholders. Thus, if an individual purchased 100 shares at $50 each, or $5,000, and signed up for the DRIP and PepsiCo issues a dividend in the amount $0.80 per share per quarter, the individual can acquire additional shares with the money. Over a period of time, the individual would own thousands worth of stock shares, especially if the stock prices increase so does the increase in the amount of the dividends issued per stock.

The DRIP system is set up as a form of automatic investment in order to take the guess-work out of the investment process and allows shareholder to benefit from compound interest. As Warren Buffet once said, “My wealth has come from a combination of living in America, some lucky genes, and compound interest”. Using the example provided, investors can relate as to how they can use compound interest to turn a small portion of their regularly issued dividends to become more shares of stock holdings.

Bonus Shares

Bonus shares are those essentials, distributed by a company among the shareholders, so that the profits are not paid but converted into shares. Thus, the owners of the shares are rewarded and the number of shares is increased, without extra investment from the shareholders. In an Indian context, there is an example of the Indian IT market, where Infosys has been rewarding its shareholders by issuing bonus shares to enhance the shareholders’ value and attract the long – term holding.

If one company, for instance, issues a 1:1 bonus share, it means that all the shareholders of this company have one share converted, into two shares. As a result, the number of shares is doubled and the price of share is halved to adjust with each other. The market capitalization remains the same, but the share price becomes affordable more for those, who want to invest in this company.

Therefore, it is very important to learn more these components and bonuses are the protected interests of the shareholders, with more shares and dividend in future. Ford once said, “A business that makes nothing but money is a poor business.” So, all the profit earning company should be involved in rewarding their shareholders, without spending money, by winds of bonus shares to win their loyalty and happiness!

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