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, for 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, 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) had $86 billion in cash and short-term investments on its books against just $23 billion in debt as of June 30, 2014. So net, it has $63 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 $31 billion in cash flow from operations. Its dividend yield is 2.8%.

Despite years of huge profits ...

Get Get Rich with Dividends, 2nd Edition now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.