Why we should celebrate paying dividends
It’s the end of the financial year here in Australia – the perfect time to reflect and take stock of our finances.
It’s our favourite time of the year at SBO because it’s when we get to calculate the dividends our clients can pay themselves.
Uh, what dividends?
For many of the clients that joined SBO this financial year, this is the first time they’ve ever formally declared a dividend and actually transferred the cash (not a book entry).
We’re talking 6-figure sums to young founders to pay down their mortgage, save for school fees, invest in assets outside of their business.
It’s a big deal for them personally and professionally.
Before working with us, they had never ‘officially’ paid dividends to themselves before. Most of them thought that dividends were just things you get from the shares you own on the stock market.
But no, as a founder and owner of your company, you are entitled to pay yourself dividends.
But strangely, many don’t.
Why? A few reasons:
- They don’t have the cash to do so
- They’re not sure how much they can take
- They feel guilty about it…
The guilt is real
Last year, my business partner and I paid our first dividend from the company.
It was a great moment for us – a nice reward for the time and effort we’ve devoted to growing the company over the last 4 years.
We transferred a 6-figure sum of cash from our business bank account to our personal one.
I should have been happy about it, but the truth was that I felt a bit uneasy doing it.
I actually felt guilty about it…
Is paying dividends playing a short-term game?
If you look at some of the world’s most valuable and admirable companies, you’ll notice they share one thing in common – they’ve never paid dividends.
- Amazon – $1 trillion dollar market cap, has never paid a dividend
- Alphabet (Google) – has over $100B of cash in the bank, has never paid a dividend
- Berkshire Hathaway – run by the world’s most successful investor Warren Buffett – never paid a dividend, ever!
The CEOs of said companies almost gloat about their non-existent dividend policy.
They’re signalling. That paying dividends is a sign of short-term thinking, and successful businesses like ours are in it for the long term.
‘People like us do things like this’.
It’s stories and messages like this which made me feel guilty about the idea of taking money off the table.
To pay a dividend for ourselves, at the opportunity cost of cash that could be reinvested into the growth of our company.
But we did it anyway.
Because, hey, it’s nice to have some cash to pay down the home loan.
And also – taking dividends is not something that’s celebrated enough!
Starting and growing a business requires a level of resilience and tolerance for risk that is not for the faint of heart.
We sometimes feel the need to wear this as a badge of honour – that playing a high stakes game comes with the job title of being an entrepreneur.
I mean, the very definition of an ‘entrepreneur’ is a person who sets up a business or businesses, taking on financial risks in the hope of profit.
Risk, being the key word here.
We’ve all risked a lot to be where we are. Time, capital, effort, relationships.
And that’s why I think it’s important to de-risk it.
To take a bit of money off the table every now and again.
Because being in business can be a high stakes game if you let it.
And if it all blows up, at least you’re walking away with pockets half full.
But here’s the thing – you need to generate a profit to pay dividends.
You need to make money, not burn it.
So, let’s stop celebrating ‘capital raises’, and let’s start celebrating dividends.
Have you paid dividends in your company? Did you feel the same guilt as I did?