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why do some organizations pay dividends, but not all of them? min 200 words

why do some organizations pay dividends, but not all of them? min 200 words

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Dividend policy varies from firm to firm based on the financial needs of a business, the expectations of the market, the firm policy among other things. A company that has heavy investments lined up for the future and is already overleveraged as per the balance sheet may choose to finance the investments with retained earnings rather borrow new debt. The primary reason being retained earnings is the cheapest source of financing for a firm although the cost of capital will be equated to the cost of equity. When a company is overleveraged, debt payments can cause a burden on the finances due to obligatory payments. In this case, the firm has a very little or no dividend payout ratio. The reason can be if the organization wants to maintain the current share price and in turn the market cap, then it may not choose to pay dividend since paying dividends reduces the market price. This will meet the rate of return expectations of the investors since firms believe that they will be better off having capital gains from the stocks than dividend payments. The other reason can be that the firms want to build on excess reserves and have stock repurchase in the future. This will enable control of the firm in the hands of a few investors and make management decisions easier.

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