I like to know usually what stocks pay high dividends? Small caps or Mid caps or Large caps?
Dividends are not paid by virtue of market capitalization… rather the dividends are paid based on ‘the- best -use- of- cash’ basis.
To begin with, if a company has to pay dividends, it has to be generating cash operationally or should be sitting on a huge reserves of cash. Assuming one of them or both are true… here are some of the factors that the company should consider about before distributing dividends…
-
Remember dividend is cash going out from the company’s pocket to its shareholders pocket
-
If the company is on growth phase…then they are better off retaining cash than distributing as dividends. Retained cash can be used for investing for better future business prospects. Example - Wonderla
-
If the company has grown quite well they can probably do a mix of both - reward the shareholders to some extent but retain a large chunk of money for future use. Example - Most of the Indian companies fall in this category
-
If the company is very well established and the growth rate starts to slow down, then the company is better off distributing the cash to shareholders as this is the best use of cash. Example - Infosys.
From a financial theory perspective the above points are well described and translated to financial mathematics by Myron J Gordon. The theory is called the ‘Gordon Growth Model’. Suggest you Google for further information.
5 Likes