Sanrith Descartes
Veteran of a thousand threadban wars
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First thing to correct. Investors are owners. They aren't being incentivized, its their money. the company's board (agents working for the owners) will choose to return a share of the profits to the company's owners through a vehicle called dividends. Another vehicle is called share-buybacks. Sticking with dividends, if you purchase stock in company X for 100$ a share and it pays 5$ a year in annual dividends, it is returning 5$ a share of the profits back directly to the owners/shareholders. This is usually paid quarterly. The standard metric for this is called the dividend yield. Annual dividend/the price you paid for the shares. in our example the div yield is 5%. So in the basic, you get a 5% return on your investment no matter what the stock price does. When the dividend is processed (not getting in the weeds with this on ex-div date, record date etc) the share price drops by the amount the dividend is declared. So technically if the share price never moves for a year, it would drop 1.25$ each of the div dates and at the end of 4 quarters you would have been paid 5$ per share and the share price would be 95$ (thus no paper gain). The reality is share prices do move. In the same example lets say the year ended with the share price at 105$ and you got 5$ paid out in dividends, your net return for the year would be 10% (5$ in share price appreciation and 5$ in dividends).
So evaluating if you want to buy a stock and projecting out annual returns, whether or not it pays a dividend factors into your expected returns. Dividends aren't normally "crazy high". But getting a rock solid company that pays a 3 or 4% dividend yield is a nice consideration. "Usually" some companies wont pay dividends and instead focus every dollar back into the company to grow it and thus the idea is that instead of dividends back you are compensated with a higher appreciation of the share price and make your return that way. For example AAPL current at its sky-high price only pays a 0.75% div yield. but its stock price is up close 100% since the crash.
edit: just to correct a company doesn't need to turn a profit to pay a dividend. It can lose money and still pay a dividend. In that case it tends to borrow the money to pay it. Don't ask. This is a rabbit hole you wont want to travel down. Suffice it to say, a good metric to look at is free cash flow to dividend payments. Does the company have enough cash to continue paying dividends without borrowing money.
