Why do Stocks Pay Dividends?

When a company earns a profit the money is typically reinvested in the business (this is called retained earnings). Some companies, often large established corporations and others in high earning industries. When a company has more cash then they need for running the business it can be paid to its shareholders as a dividend. Paying dividends reduces the amount of cash available to the business, but the distribution of profit to the owners is, after all, the purpose of the business.

There are three ways a company can pay a dividend:
1.) Cash Dividend - These are most common and are the ones that in which we are most interested!
2.) Stock Dividends - The company can issue and distribute additional shares of stock.
3.) Property Dividends - Very Rare These are usually paid in the form of products or services provided by the company; often in the form of securities of other companies owned by the issuer.