April 13, 2021

Find our what dividends are and how they can contribute to the growth of your investment portfolio.

Dividends are a portion of a company’s profits that are paid out to shareholders.

Most of the time, shareholders will receive their dividends in cash but they can also be given more company stock instead of money — this is known as reinvesting.

It’s generally larger, more established companies that pay out dividends. The reason for this is that they can afford to do it.

A startup will need to use a large chunk of its earnings to build products, hire new staff and expand its operations.

Apple didn’t pay dividends until 2012, when it made $156.5b in revenue. The tech giant has around $205.9b in cash reserves.

Conversely, a big company like Barclays is less likely to need to do those things so they can afford to take a part of their earnings and pay them out to shareholders.

Who pays dividends?

Lots of companies! The majority of FTSE 100 stocks will pay out dividends.

HSBC is arguably the most famous one. The banking giant pays out regular dividends to its investors. In 2018, the company paid shareholders a $0.51 dividend per share.

That may not sound like a lot but, in total, it amounted to $10.2 billion.

HSBC was able to pay that amount on the back of a post-tax profit of just over $15 billion.

Still, there is a risk that the bank could become a victim of its own success. Large HSBC shareholders often invest huge sums of money in the bank because they want a steady stream of dividends.

Take Ping An. The Chinese insurer became HSBC’s biggest shareholder in 2018 and it cited the bank’s “relatively high dividend payout ratio” as a major reason for its investment.

Having big companies invest in you is generally a good thing. But if they are only looking for dividend payments, that could end up hurting HSBC.

If the bank decides to use its earnings for other business activities, it could cause a backlash from dividend seeking investors who might then sell off their shares in the company.

READ MORE: Five tips (and a half) on how to increase your dividend income

Why some companies don't pay dividends?

There are plenty of companies that don’t pay any dividends. This is not necessarily a bad thing and there could be good reasons for a firm choosing not to do so.

Online retailer ASOS has been publicly traded since 2001 but has never paid dividends to its shareholders.

There are a couple of likely explanations for this.

The company began trading on the London Stock Exchange in 2001, only a year after it was founded. That meant the retailer was still in its early days when investors first acquired shares in the company.

This is important because companies which still have a lot of room to grow will spend their earnings on all the different people, products and places they need to expand — not on dividends.

The thing is, ASOS is still trying to grow. Last year the e-commerce company launched in the US and it has also been trying to make headway in Europe.

Some recent setbacks may have shaken them but — for the most part — the lack of ASOS dividends hasn’t bothered investors.

Since it went public in 2001, shares in the retailer have increased in value 129 times over — so if you’d bought £1-worth of shares when it first listed, they’d now be worth close to £130.

READ MORE: Five companies on Freetrade that pay dividends

Why would a company stop paying dividends?

Some companies do stop paying dividends over time. This might be a bad sign for investors or it might be a sensible move on the part of the company.

Sports Direct is a retailer that many people will be familiar with. The company, which changed its name to Frasers Group in 2019, sells clothing online and in-store across the UK and is run by controversial businessman Mike Ashley.

Soon after it went public in 2007, Sports Direct started to pay dividends to shareholders.

Two years later, however, the company decided to stop doing that. Ashley’s firm justified this move by saying it needed the cash to pay off its lenders.

Since then the company has given a number of different reasons for not paying dividends, including a need to spend on growth and pay company-wide bonuses.

This policy doesn’t look likely to change. At a company meeting in 2019, Ashley, after railing against a number of political leaders and business people, said that he wanted to pay a company-wide bonus worth £100 million.

“I’m not going to hide away from the fact that I think it’s the right thing to do,” said Ashley. “​We’d like to see 50 millionaires.”

Good for the company? Yup. Good for investors looking for dividends? Not so much.

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