The Business Book

126

I F W E A L T H I S P L A C E D

W H E R E I T B E A R S I N T E R E S T ,

I T C O M E S B A C K T O Y O U

R E D O U B L E D

INVESTMENT AND DIVIDENDS

A

fter calculating the year’s

profit, a company’s

directors can choose

whether to pay a dividend to

shareholders or reinvest the sum.

A dividend is the annual payment

to shareholders that most businesses

manage each year. It might amount

to a 3 percent return on the sum

invested, which would make it

comparable to the interest a saver

might receive from a bank deposit.

How much a company pays in dividends or

reinvests in the business is decided...

Directors must balance the need for reinvestment

in the business with shareholder returns.

...according to growth prospects and the health

of the balance sheet.

When growth is high, or the

balance sheet is weak,

companies should retain cash

for reinvestment.

When the balance sheet is

strong, or growth is slowing,

companies should pay

dividends

to shareholders.

IN CONTEXT

FOCUS

Financial strategy

KEY DATES

1288 The first recorded share

certificate is issued to the

Bishop of Vasteras in Sweden

by Stora Enso, a pulp and

paper company.

17th century The Dutch East

India Company issues shares,

heralding the emergence of

organized share trading.

1940 Peter Drucker writes on

the need for businesses to

balance short-term dividends

and long-term reinvestment.

1961 Modigliani and Miller

claim that paying or retaining

dividends does not affect

a business’s long-term

performance. Their seminal

work is later disputed, with

several studies showing that

dividend increases boost a

company’s share price.