July 2012
Beginner
201 pages
5h
English
Content preview from Get Rich with Dividends: A Proven System for Earning Double-Digit ReturnsBecome an O’Reilly member and get unlimited access to this title plus top books and audiobooks from O’Reilly and nearly 200 top publishers, thousands of courses curated by job role, 150+ live events each month,
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CHAPTER 4
Why Companies Raise Dividends
Generally speaking, management and investors have a difference of opinion on what to do with the cash on the company’s balance sheet.
Management wants to keep it to use for acquisitions, growing the company, and as a buffer against bad times. Unless a company is in its early stages or in hypergrowth mode, investors usually want to get some of that cash back—particularly if the company is growing the amount of cash flow it brings in every year.
Going back to Marc Lichtenfeld’s Authentic Italian Trattoria example, if you invested in my restaurant and after a few years, we’re pulling in $200,000 per year in profit, you may start to get antsy and demand some kind of payout.
I, however, may have my sights set on a new location, or want to knock down a wall to expand seating, or add more staff that will help turn the tables over more quickly.
At some point, I have to balance my investors’ demands with my plans for growth. Of course, if you have more money than you know what to do with, it’s an easier problem to solve.
Microsoft (Nasdaq: MSFT) has $52 billion in cash on its books against just $12 billion in debt. So net, it has $40 billion in cash. As they used to say in the old New York Lottery commercials, “That’s a lot of bread.”
Over the past three years, Microsoft has generated an average of $23 billion in cash flow from operations. Its dividend yield is 3%.
Despite years of huge profits and cash flow, it wasn’t until 2003 that the company ...
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