Shareholders Are Demanding More

Q: Why don't companies pay out all their profits to shareholders? It belongs to them after all.

A: When you own stock in a company, you own part of that company. When the company earns money, part of that profit is supposed to belong to you, the investors. But you're right. Investors usually get back just a fraction of the money companies make in a form of dividends, or periodic cash payments made from the company's coffers. And some highly profitable companies, like Apple (AAPL), don't pay a dividend at all. Why is this happening?

You see that currently, companies are paying 7.6 cents for every $1 in stock price, or an earnings yield of 7.6%. Meanwhile, the S&P 500 is paying much less than that to investors. Stocks have a dividend yield of just 2%, which is the percentage of cash paid back to shareholders. There are several reasons. First of all, companies are not required to pay profits back to investors. They may, and do, retain earnings. Part of that is prudent. After all, just a few years ago, companies found themselves unable to borrow and even giant companies like General Electric (GE) had to borrow money from investors at less-than-flattering terms.

Source: USA Today

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