Why do companies distribute dividends to common stockholders?

Distributing dividends to common stockholders serves as a signal of a company's financial health and can attract more investors. When a company consistently pays dividends, it demonstrates to the market that it has sufficient earnings and cash flow. This reliability can reinforce investor confidence, indicating that the company is capable of generating sustainable profits. Furthermore, a well-established dividend policy can appeal to income-focused investors, making the company's stock more attractive, thereby potentially increasing its market value and liquidity.

Other options do not align with the primary motivations behind dividend distribution. For instance, decreasing the asset base does not logically justify the distribution of dividends, as that is more aligned with asset management strategies that are not immediately related to benefiting stockholders. Retaining earnings for future investment directly contradicts the purpose of paying dividends, as it suggests reinvestment rather than distribution. Likewise, while some companies may have regulatory requirements to meet certain financial standards, paying dividends is generally at the discretion of the company’s board and is not typically mandated by regulations in the same manner as compliance might suggest.