Why Do Companies Pursue Stock Buybacks and Dividends?
- Companies rely on investment by individuals and institutions (e.g., pension funds) to finance their operations and grow. These individuals and institutions expect a return on their money.
- Companies must invest their profits to grow – by expanding business lines, investing in research and development (R&D), and attracting and retaining talent.
- At some point companies may run out of opportunities with growth potential to justify deploying profits. In such cases, they often return money to shareholders via buybacks or dividends.
Who Benefits from Stock Buybacks and Dividends?
- Federal Reserve data show that a majority of U.S. households have direct or indirect ownership of stock via pensions, 401(k)s, or investment accounts, all of which benefit from dividends and higher stock prices.
- Seniors are among the biggest beneficiaries, with over half their income is from dividends, 401(k)s, pensions, other investments, according to IRS data.