One of the side effects of the financial crisis and the subsequent recession has been the tendency of companies to hoard their cash. Many companies cut dividends, or did away them altogether, during the recession. There are some companies that are sitting on piles of cash right now. Many companies have been seeing better than expected earnings, and all of that cash could be put to different uses. One of those uses might be increasing the dividends they pay out to shareholders.
Using Dividends to Attract Investors
Many companies use dividends to attract investors. In some cases, these companies offer dividends that are unsustainable in order to bring in investors. While you can get some good opportunities with these types of stocks, you might not want to invest in a company that could cut dividends quickly. If you are looking for income investments, considering companies with lots of cash might be a good idea. These companies are generally strong companies, and often include dividend aristocrats that regularly increase payouts.
Companies devoted to rewarding their shareholders when they have extra cash are more likely to attract long term investors – investors who are likely to stick with the company over the long haul. And investors can get decent returns. Indeed, many dividends stocks are providing better yields than what could be had with Treasury bonds and many corporate bonds right now.
Some Companies Do Other Things with Cash
Not all companies pay out more dividends when they have the cash. Instead, some companies initiate stock buy backs, or make acquisitions of other assets. Indeed, Microsoft recently used some of its piles of cash to spend billions to buy Skype. No dividends there. In other cases, companies reinvest their cash in equipment, advertising or other assets meant to help grow market share or increase profitability over the long run.
For some investors, though, this is a worthwhile exchange. Rather than getting dividends, some investors are content to benefit from a share price that goes up on mergers and reinvestment moves that turn out well. Investors looking for regular income, though, are more likely to decide to go for dividends, since they provide the opportunity to for people to create an income portfolio that can offer stability for years.
Your investing goals will help you determine what you prefer. If you want to build an income portfolio, choosing companies that give cash back to shareholders is ideal. If you are more interested in growth and returns, looking for companies that reinvest, rather than paying cash to shareholders.