In the United States alone, over 176 million Americans hold shares in the United States stock market. This number shows how personal the performance of the United States economy is to millions of Americans. Not only are individual business’s in the United States motivated by earnings and corporate performance but so are individual Americans. This creates a culture in the United States where the vast majority of the people are involved and trying to benefit the economy as a whole. With this culture of individual investing many people have not been properly educated on the topics of corporate finance, company evaluations, and investing. This creates many unknowns for individual investors when it comes to the specifics of companies they invest in and what it means for them as an investor and for the company performance as a whole. This can really hurt an investor as some of those details can be very important and might hinder their total return over time. One of these details that is very important is dividends. Each company in the United States has a stance on dividends or a dividend policy. This policy affects both the investor and the company. The dividend policy that benefits the investor the most is one that increases exponentially with the company’s earnings because it reduces risk, increases stability, and maximizes returns.

Dividends are a policy that many investors over look and do not analyze nearly enough. It has a bigger impact on the long term performance of the stock than several other indicators. “A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property” (Investopedia). When a company reports earnings, they have several different things they can decide to do with them. A few of the most common things include reinvesting earnings into the company, buying back shares of stock, or giving out dividends. These three options are used by every company and all are beneficial for the firm. We are going to focus on the dividend side of earnings capital allocation. Dividends have a long history in the United States market. Dating back to before the 1950’s the Standard and Poor’s index has reported some sort of dividend. Dividends and their policies have changed dramatically over time just as the market has. The United States economy will go through decades of high yield stock averages to very low yield stock averages. “A yield is the income return on an investment, such as the interest or dividends received from holding a particular security. The yield is usually expressed as an annual percentage rate based on the investment's cost, current market value or face value” (Investopedia). So basically, yields are a way to measure how big or small a dividend is in proportion to the firm’s total earnings. 

Even though many investors understand what dividends are and what they do, many people still do not understand why companies give out dividends. Companies across the world and especially in the United States have learned the importance of dividends. There are many different motivations and reasoning behind why companies give out these dividends. One of the more moral explanations would be that the earnings of the company do belong to the shareholders at the end of the day. If these earnings are rightfully the shareholders, do they not deserve to receive some of it on a regular basis? Another and maybe more prominent reason that companies pay dividends is to reward the shareholders. Firms give out dividends as a way of saying thank you to the shareholder for putting their money into that specific company. For almost every investor this extra cash flow is very enticing and will sometimes even keep an individual invested in the stock even if the stock’s performance has not lived up to expectations. A third reason companies may give out dividends is because they feel it will help them attract new investors. Many times, when analyzing company’s, investors will examine the dividend yield, as they should, and that may be a key indicator for them to invest in that company or firm. A great example of this would be how many big, blue chip stocks look to acquire investments from retired Americans. To do so, they know that these investors want a steady stream of cash flow with a low risk company. So, several companies such as AT&T, Procter & Gamble, and Johnson & Johnson will pay a high yielding dividend to attract investors. Dividends typically please the investor and are a driving factor for keeping the moral up in a stock. Individual investors are very emotional and if companies are able to keep them happy they can retain their investors long term.

One of the biggest obstacles that stop investors from entering the market is the fear of losing everything. Risk is a very real fear and should not be underestimated when investing in companies. Universities create entire majors and companies create career paths to deal with risk and risk management. The educated investor understands the risks and manages them accordingly. One of the simplest ways to reduce an investors risk is by allocating capital to an equity that pays a dividend. When a company pays a sustainable dividend, it allows the investor to have a virtually guaranteed return on investment. Even if the firm is stagnant in growth or does not meet earnings estimates, the investor is still receiving returns from the dividend. A stock may even fall a percent or two and your overall return will still breakeven or be positive. 

As many Americans know the United States economy can be very volatile and have many unexpected swings and turns. The economic cycles in the United States may worry its citizens because of the unpredictability of the market. Most people like having a sense of control and enjoy knowing what the future holds for them and their families, but the market seems to be something they cannot control. With all of these uncertainties in the market, investors look for ways to create stability and consistency. When companies implement specific dividend policy’s they are able to achieve this. Yes of course, no company can completely stabilize the economy, but steadily growing dividends are as close as any investor is going to get. The best way to acquire this stability is to invest in dividend aristocrat stocks. A dividend aristocrat means that the company has been paying and increasing its dividend for at least 25 years in a row. If an investor buys shares of a dividend aristocrat, they are getting as close as they can to a steady and stable return as possible because of the power of dividends. Dividends create the stability that all investors want and cannot get anywhere else. 

Dividend policy has a variety of opinions when it comes to the financial world. Many extremely credible fund managers or investors have very different opinions on if and how much dividends should be paid out. This makes it very difficult for companies to decide on a dividend policy that benefits the company and the investor. One of the very age-old opinions on dividends is that they should not be paid out what so ever. Some investors believe if a company is paying a dividend they are sending signal to the market that they don’t have any ideas on how to invest their capital. They also believe that if you want a dividend producing stock that you are making a statement saying you believe you can do better things with the company’s earnings that the management themselves. One of the most famous investors of all time, Warren Buffett, believes something like this. Warren Buffett has invested in thousands of companies and has made tremendous wealth, enough to make him the 2nd richest man on the planet (Forbes). Mr. Buffett has and still holds hundreds of companies that pay dividends. A ridiculous amount of money comes into his firm every quarter from dividends. Where Buffett differs from many others is from a management perspective. He is founder and CEO of Berkshire Hathaway, a company which holds all his investment portfolio and the capital of his investors. For Berkshire Hathaway, Warren Buffett refuses to give out a dividend. At the annual shareholders meeting for the company, his shareholders will ask him to start a dividend payment for Berkshire Hathaway. Every year he shuts down the idea. Warren Buffett does this because he believes and rightfully know that he can do better things with the company’s earnings than his shareholders. This dividend policy is ego based and not actually proven to work long term. This policy is not what is best for his shareholders, but it is what he believes is best for him. 

Many other investors disagree with Warren Buffett’s stance on dividend policy. So many big-name wall street investors and entrepreneurs see the value in dividends and the long-term benefits of them. A very famous entrepreneur and fund manager, Kevin O’Leary, became famous when he sold one of his businesses in 1999 for $4.2 billion. Since then he has started many new ventures and businesses one of which is a financial firm called O’Leary Funds in 2008. This firm manages around $2 billion in assets as Kevin O’Leary has developed and launched his own ETF. Mr. O’Leary has had tremendous experience in the financial industry and is very open about his investment strategies. O’Leary claims that he will never invest in a stock that does not pay a dividend. He explains how the value of a stock is very volatile and exposed to risk. O’Leary says he finds value in a stock that actually returns capital to its investors, not a company who never gives money back to their shareholders. To him, that stock is a lot less valuable because it creates no sense of cash flow for him.

There is value in the opinions of many professional financial institutions and individuals. But with so many varying opinions how can the average American decide what will benefit them the most when it comes to dividend policy. I believe there are many risks when associating your capital with a stock that does not pay a dividend at all. A dividend reduces risk for the investor by returning capital to them which they can then diversify to other positions or allocate back into their original investment. Let’s say for example a stock pays a 3% dividend yield. The dividend reduces the investors risk so dramatically by providing a cushion. If the company has a bad quarter and the stock dips 2%. The investor still has a positive total return. This is extremely important when analyzing the risk associated with a stock because the dividend can be a huge factor. If an investor is able to become a shareholder in a stock that has a steady growth rate in earnings and profit while also paying a steadily growing conservative dividend yield, they will be able to maximize profit while reducing risk. A way a dividend can maximize profit is by increasing the total return to the investor by whatever percentage the yield is. If the stock performs very well the dividend payment will increase the rate of return. This will add up over time and really make a difference in your portfolio.

Dividend Policy is prevalent in every company and important to all investors. The impact on the way a company handles dividends can really make or break a company long term. Dividends can be utilized as a steady flow of income for investors and build up over time without them even knowing. For many it creates a heedless source of income that when realized several years later people are extremely thankful for it. On the flip side, when an investor is intentional about acquiring shares of companies that have strong dividend yields, they are able to create a phenomenal rate of return. This rate of return is typically superior to the majority of other investors but also to the professional active fund and portfolio managers.

The benefits of actively and intentionally investing in companies that pay steadily growing dividends can make the difference in your portfolio. Utilizing the opportunities with dividend rich companies will give the investor an edge of others. By investing in these companies, you are well on your way to securing your financial future and boosting your portfolio growth. If the investor decides to reinvest their quarterly dividends back into the original stock or into another growing dividend company, you will begin to see somewhat of a snowball effect in the balance of your portfolio. The sooner you begin holding positions in these companies the sooner you will be paid and receiving cash flow. The more cash flow you are able to reinvest now or in the near future it will vastly impact your portfolio in the long run positively. This strategy works very similarly as compounding interest, but is even better because it also allows the stock to grow in value and the actual worth of your shares will increase not only the amount of shares you control. When investing in companies that implement a steadily growing dividend policy you are able to secure a stream of cash flow and providing financial security for your family and future. 
