A Companies Earnings

Every person deals with large companies almost on a daily basis. We purchase food, clothing, utilities, and other items from them. Most people never stop to think where the profits these companies earn actually end up. After a company pays taxes, its employees, and other bills its profits are funneled down to its share holders. Stock holders have two ways to actually receive a piece of a company’s profit: dividends and capital appreciation.

Many common stocks and all preferred stocks pay dividends. A dividend is a payment that a company makes to its shareholders from its earnings. Generally dividends are declared annually but paid on a quarterly basis. However, a quarterly payment schedule is not a legal requirement. The timing and amount of the dividend is entirely the discretion of the company’s board of directors. If you hold a dividend paying stock the company will either mail you a check or deposit the money directly into your brokerage account. Many brokerages will allow you to automatically reinvest your dividends.

If a company does not pay dividends they are reinvesting 100% of their earnings back into the company or repurchasing stock. Many investors believe it is better for a company to reinvest earnings in order to grow faster which should coincide with stock appreciation. These investors see company’s that pay dividends as stagnant with limited growth options. Historically dividend paying companies have done fairly well and they have actually grown just as much, if not more, than their non paying counterparts.

A company may also choose to repurchase their own stock rather than paying a dividend. That means the company is buying stock on the open market and retiring the shares. This will lead to fewer shares on the market and therefore increasing a company earning per share. If a company’s earnings per share rises then the stock price should rise with it over time. In practice many companies declare share repurchases but then fail to actually follow through.

The business a company is in generally decides what a company does with its profits. For instance if the company is a technology company it will most likely reinvest most of its profits into new technologies. To-do otherwise would result in the company fading into obscurity. In the end many companies do a combination of all three options with their earnings. That is they generally pay a dividend, repurchase shares, and continually reinvest in the company.