Companies usually pay out their profits in the form of dividends, or they reinvest the money back into the business. Dividends provide shareholders with a cash payment, and reinvested earnings offer shareholders the chance to receive more profits from the underlying business in the future. Many companies, especially young ones, pay no dividends. Any profits they make are plowed back into their businesses.
One of the most important jobs of any company's management is to decide whether to pay out profits as dividends or to reinvest the money back into the business. Companies that care about shareholders will reinvest the money only if they have promising opportunities to invest in--opportunities that should earn a higher return than shareholders could get on their own.
Different Capital, Different Risk, Different Return >>