Dividends are cash payments made to the owners or stockholders of the company. A profitable year allows them to make such payments, although there generally are no obligations to make dividend payments. When a company has both common and preferred stockholders, the company has two different types of dividends to pay. Every publicly traded company has common stockholders. A firm may decide to plow all of its earnings into new investments to promote future growth.
Preferred stockholders are in line before common stockholders if a dividend is declared.
However, not all companies have preferred stockholders. As an investor, it is important to know what a company does with its net earnings. An investor needs to know the company's dividend and retained earnings policies to decide whether the company's objectives are in line with the investor's. If the company pays dividends it is income-oriented. If it retains earnings for future expansion, it is growth-oriented.