Does it matter whether or not firms pay dividends Essay

Does it matter whether or not firms pay dividends - Essay Example This research will begin with the statement that one of the essential parts of a company investment return is a dividend. Being paid on an annual or quarterly basis, a majority of companies pay dividends to the shareholders while others retain their entire profit and reinvest. Even though reinvesting back the profit is vital for the future expansion of the company, it significantly matters whether firms pay dividends. Based on the importance of shareholders in the capital growth of any company, it is fundamental for the management to rewards the shareholders by giving them a portion of the company profits so that they can use it for their own investment or education of their children among other personal use. A company that regularly pays dividends to its shareholders indicates fundamentals. In the 1930s before firms were under legal obligation to pay a dividend, their financial health was indicated by their ability to pay a dividend. Notwithstanding the laws and legislation such as the securities and exchange act of 1934 that brought about a significant level of transparency in the financial management of firms, dividends are still a notable yardstick of the company performance. Â  Mature companies pay dividends and still retain more profits for reinvesting. A good example of a company that has benefited from giving its shareholders dividends is Microsoft. During the early years of the company operations, the company did not pay dividends but it reinvested a significant portion of its profit for future growth.