Increase Curb Appeal

• For some companies, the dividend payout and the history of maintaining and increasing dividends is what makes the stock an attractive investing vehicle. Some investors, both individual and institutional, require that the stocks they own pay dividends. In certain mutual funds, if a stock eliminates the dividend, it can no longer be part of its holdings. Traditionally, dividends are paid quarterly out of the company's profits after taxes and provide a steady source of income for investors.
  
  

No Immediate Purpose for Cash

• Companies need cash on hand to grow. With cash, companies can hire employees, make capital expenditures, or even acquire other companies. Sometimes, however, management has a hard time making up its mind on how to use its cash. When this happens, management can elect to continue to sit on the cash or return some of it in a form of a dividend called a return of capital. This money is not paid out of the company's profits, but out of its bank account.
  
  

Inability to Achieve Returns

• During a high growth phase, companies rarely pay dividends as the cash is retained for the business to grow. Investors do not complain because the price of the stock is accelerating. However, as the company matures and the growth rate slows, so does the appreciation of the stock price. If the company starts to show a trend of being unable to grow at an acceptable rate, management will often implement a dividend payment to give the investor some return.
  
  

Required by Contract or Law

• Some companies, such as real estate trusts or royalty trusts are required to pay out significant portions or all available income to its stockholders. A real estate trust pays no corporate income tax and earns money on leases and the sale of property. To maintain this tax-advantaged status, 90 percent of the company's income must be paid out to shareholders each quarter. In a royalty trust, which typically owns interest in natural resources such as oil, natural gas, or minerals, the trust has an established operating agreement which describes the dividend payout structure. The royalty trust must adhere to this contract.
  
  

Avoid a Hostile Takeover

• Although it is rare, sometimes companies will pay out a special dividend to stave off a hostile takeover. For example, there are cases where the company has more cash in its bank account than what the stock market is pricing it at. If the cash surplus is large enough, a larger company can buy out the company for less than what it is worth. If a company with a large cash horde feels this is a risk, a company can declare a special dividend payout, reduce its balance sheet, and make the company less attractive to a cash hungry suitor.