Paying Dividends (Literally)

They’ve been holding on to trillions of dollars in cash, but companies are finally making a move with their money: giving a decent chunk of it to investors.

In a move that raises questions about where else the funding could go, S&P 500 firms increased net dividend payments in the first quarter to $16 billion—$6 billion, or 60%, more than the same period last year. In doing so, firms are rewarding loyal shareholders who have weathered a decent degree of economic volatility and uncertainty. “It’s good business to take care of shareholders that have stuck with you,” says Jason Waterman, a senior client partner in the Global Financial Officers practice at Korn Ferry.

To be sure, the dividend growth is partly a function of the record amounts of cash on companies’ balance sheets. S&P 500 companies currently hold $2.6 trillion of cash, the result of two years of diligently preserving savings, cutting costs, slowing down investments, and other measures. With uncertainty over interest rates, a slowdown in consumer spending, and the possibility of more geopolitical conflict in the coming months, Waterman says paying dividends is a relatively risk-free way to put money to work and generate goodwill among investors. “Boards aren’t going to push back if the firm has the cash,” he says. Paying dividends now, he adds, will help firms gain investors’ buy-in to pursue strategic alternatives, whether for mergers and acquisitions down the road or investments in artificial intelligence that won’t yield returns for years.

Peter McDermott, a senior client partner in Korn Ferry’s Global Corporate Affairs practice, says that from an investor-relations perspective, a company that pays a dividend potentially opens the door to a brand-new investor base. “Even if the dividend yields are small, investor-relations teams can get their foot in the door with a new cohort of potential buyers, and hopefully increase the value for all shareholders,” he says.

Still, critics have perennially argued that instead of paying higher dividends, firms should invest their extra cash into research and development, hiring and retaining talent, and other strategic moves that would ultimately serve multiple stakeholders. “I guess it kind of depends on what one’s perspective is and the purpose of a corporation,” says Jeff Constable, co-leader of the Global Financial Officers practice at Korn Ferry. He says it’s understandable that employees would argue they, not shareholders, should be rewarded; he explains that dividends are more of a capital expenditure paid out of cash on the balance sheet, where compensation is more income-statement based. “If you own the company, you’d rather see excess cash be used for investments or dividends, unless of course the company can’t hold onto its employees due to paying too little in terms of comp,” he says.

Regardless, at least one industry is shifting into the dividend game big-time: large tech firms. Constable says many of them paid dividends for the first time ever this quarter. Dividends are often a feature of mature, established, stable companies with predictable revenue and earnings—what’s known in investor parlance as “value” stocks. Now, however, many so-called “growth” companies, like those in tech, are paying dividends to incentivize shareholders to stay in their stock instead of fleeing to a rival’s. “These companies are generating so much excess cash that they can attract both growth and value investors,” says Constable. “It’s a whole new paradigm in corporate finance in some ways.”

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