Why companies pay dividends Essay

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Introduction:

Dividends represent one of the methods in which firms divided their profit generated by companies' activity. Dividends are usually a cash payment, which are paid on a quarterly or an annual. It is depends on the company dividend policy and, currently, there are many discussions about whether it is necessary for organizations to pay dividends or it is better not to pay them. Depending on the aims of the firm and current position in the market, a company may take one or another decision. This work will deal with questions of why companies pay dividends and why it is very important.
The dividend policy of the company has a great influence not only on the capital structure, but also on the investment attractiveness of a firm.
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Research has shown that one of the most prevailing aims of paying dividends is to attract investors, who are looking for stable return from shares. Allen, et al. (2000) highlights that companies which pay dividends attract more shareholders and, as a consequence, such organization is more successful and operate better than firms which do not pay dividends.
Moreover, according to Soter, et al. (2003) the procedure of paying dividends is an indicator of the stability of the company's activity and the accuracy of the distribution of revenues. If payments are made regularly, almost at the same time, if they are constant or increase steadily, it helps to provide a company with a success, arouses trust and attracts investors to cooperation. Thus, dividends can act as an indication of financial health of the firm. Schiffres (2010) supports the point of view of previous authors and also gives an example, where demonstrates that even in the World Financial Crisis a price of the stocks of the companies which pay dividends decline less than a price of nonpaying firms.
It must also be noted, that, according to Juma'h and Pacheco (2008) dividend paying firms are less risky and shareholders often prefer to invest their money to such companies rather that another.
Furthermore, Hussainey (2009) agrees with the previous researches and states that companies which pay dividends have a higher share price than nondividend-paying organizations. In addition, when unprofitable firm decides
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