Overview

Dividends represent earnings that a corporation distributes to owners. Dividends for a corporation can be compared to withdrawals from a sole proprietorship or partnership. However, there are substantial differences between a partnership withdrawal and a corporate dividend due to differences in the business structure. A partner in a partnership generally has more control over the amount of draws they can take and when they can take them. Different partners may also draw different amounts at different times. By contrast, a corporation must give uniform distributions of dividends to each class of shares, resulting in far less direct control by an individual shareholder to determine the amount of dividends or when they will be distributed. The dividend distribution policy of a corporation can be very complex, involving many factors, including the life cycle of the company, the cash flow of the company, and the preferences of the shareholders. A company that is in the growth phase of its life cycle is more likely to have smaller dividends, preferring to reinvest the money to grow operations. Shareholders who would like to invest over a longer time frame may like this policy because the increase in value of the company will increase the value of the shares. A company in a mature phase of the life cycle may not have as much need to reinvest earnings and is more likely to distribute earnings to shareholders. Many investors like investing in dividend yielding companies because they receive a return on their investment in the form of dividends.

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