A dividend is the spare cash your company doesn't need after it's paid all its direct and discretionary costs and put something away for a rainy day.
If you're fortunate enough to declare a net profit at the end of your financial year, then you might consider giving some of it to your shareholders, in proportion to their shareholding, including yourself. That's a dividend. Or you might choose to hang onto it because there are storm clouds on the horizon and you might need to spend it on your business.
There are some companies (Amazon springs to mind) that don't pay dividends. They prefer to invest any spare cash in further expansion. Investors know and accept that when they buy their shares any financial benefit they receive will have to come from an increase in the value of the shares, rather than dividends.
Any limited or public company can pay a dividend - it's up to the directors to decide how much. It's common for successful one-man consultancy style businesses to pay a dividend; the director is the sole shareholder, so in addition to getting a salary s/he declares a dividend. This can be a more tax efficient way of getting money out of your business, but the tax rules frequently change.
It's not so common for startups (particularly those that are not yet profitable) to offer their shareholders a dividend. One obvious reason is that your investors put their money into your business to support its growth - they weren't expecting you to give it back again!
Dividends are also a way of attracting investors towards rather staid and boring companies - like utilities. Public companies that offer their shares on a stock market and that may not have spectacular increases in their share price can offer a regular dividend. The money an investor invests is rewarded with a dividend - like interest from a bank savings account. And normally at a higher rate of interest than a bank offers, because there is a bit of risk that a dividend payment might be offset by a reduction in the share price.
But this can go wrong. For example, when the water companies in the UK became public companies they attracted corporate and individual shareholders in big share sales. Over the years they declared their annual profits and paid huge dividends to their shareholders. Money they said they didn't need. They borrowed heavily to fund improvements in the water infrastructure and used some of their customers' cash to pay the interest charges on their loans. Hence they were able to declare higher profits than if they spent their own money on such improvements. And it meant higher dividends, much of which went offshore. Money literally being syphoned out of the country, leaving customers with higher water bills to pay interest charges on higher borrowings to fund urgent infrastructure improvements. Quite a racket!
You might not feel the need to decide on your dividend policy right now, but the more successful you are the more it will become a subject of discussion. And then one day you'll have a board meeting and someone will ask the question. Be ready for it.
Commentaires