Why you should spend more time thinking about company dividends

Dividends are payments made by a company to its shareholders out of its profits. They are the ‘return on investment’ for many shareholders. The value and frequency of dividends can have a significant impact on the ongoing success of your business. When done well, dividends can be the difference between the success and failure of your business.

While shares are considered an investment for the shareholder, dividends can act as a type of investment for the company. When a company declares a dividend, potential investors are encouraged to purchase shares in the company. As more investors purchase shares, more capital becomes available for your company, giving you more room to grow. Frequently giving your shareholders dividends encourages them to buy more shares and encourages other curious investors to purchase as well.

Another reason that shareholders love receiving dividends is because they act as an indication of the health of the company. Frequent declaration of dividends tells the shareholders that the company is making profits. This encourages shareholders to retain their shares and potentially purchase more.

Although there are several good reasons to declare dividends, you should always evaluate the risks and rewards associated. Dividends are expensive, so it is important to ensure that your company can spare the funds to pay these dividends. After declaring a dividend, the company is under a legal burden to pay the dividend, so it is important to be confident that the company can meet its financial obligations before declaration. Only declare a dividend when you are confident that your company has the capital to pay it.

Dividends can make a huge difference to the health of a company and so it is important that a lot of thought is put into considering the amount to be paid and the frequency of payment. It can often be difficult to determine what the best option is so we encourage you to contact our experienced team at Frank Law so we can help you make the best decisions for your company.

If you have further questions, please contact us at frank@franklaw.com.au.

This is not legal advice.