For various reasons, technology companies have often refused to pay dividends to their shareholders. In the public mind, dividends are associated with 'safe' companies, meaning their stock is assured to yield some profit. As such, the concept doesn't particularly jive with the disruptive start-ups and juggernauts that have made Silicon Valley famous. Furthermore, many of these tech companies reinvest their earnings back into the company to spur continual growth and innovation instead of doling it out to shareholders. Tax policy is yet another consideration, as dividends can be taxed as income under U.S. law, and other regulations prompt these companies to search for creative ways to circumvent them. (Unsurprisingly, taxes affect financial behavior.)
But perhaps the most important reason is that paying a dividend has typically been seen as a red-flag, an indicator that a company's growth has diminished, stagnated, or at worse ended. To avoid this potential fallout, many tech companies convince investors that future growth is robust, and therefore invulnerable to major risk. While all these methods may have been effective in the past, it hasn't stopped dividends becoming more commonplace.
Though few tech companies paid dividends in the past, the practice is starting to gain traction with more companies of varying sizes. Kickstarter (which hasn't planned on releasing an IPO) has recently announced it would start paying dividends, and joins other behemoths such as IBM (NYSE: $154.05), Hewlett Packard (NYSE: $19.76), and Oracle (NYSE: $39.99), which have begun paying dividends of their own in the past few years. Microsoft (NASDAQ: $51.16) -- one of the most recognizable brands behind the industry -- has been dishing out dividends since 2003. In truth, many of these publicly traded companies eventually have to distribute some of their earnings because they grow too big and wealthy to ignore their investors.
One of the remaining hold-outs is also one of the largest. Google (NASDAQ: $695.94), despite its massive value and influence, still refuses to embrace regular cash-payments. Apple (NASDAQ: $95.91) was a member of this club until it relented and agreed to start paying its own dividends, with a current 3% annual yield on the value of its stock. Considering Apple suffered its first downturn in revenue since 2003 in this last financial quarter, the decision to distribute dividends may be shrewd finance shoring up the company's uncertain future.
No template can determine when a tech company decides to pay dividends or not -- it depends on the company's internal politics and management. Nevertheless, the recent rise of dividend paying in the tech market does hint at a slow, gestating financial shake-up, though what this could mean in the years to come is up for speculation.
Silicon Valley has cultivated an attractive image of eschewing 'traditional' corporate practices. Cubicles? Practically medieval. Suits and ties? Nike shorts and t-shirts are far more comfortable and eye-catching. One need only cast a glance at the plastic slide in Google's headquarters for proof of the almost kiddish insubordination that has made these tech giants so different and yet so successful. But the growth of these business and the recent, shall we say, capitulation to paying dividends, show that some business practices are hard to buck.
