Companies pay dividends for a few different reasons. Companies will have decisions to make with their profits. For example, some companies focused on growth or expansion choose to take any excess profits and put them into research and development or other investment opportunities.
If the potential growth opportunities don’t match the company’s goals, they may choose to return these profits to shareholders. Dividends come from excess profits that the company decides not to reinvest in the firm. Instead of reinvestment, dividends are paid to shareholders as a reward for holding company common stock.
Dividends help control what the National Bureau of Economic Research refers to as an agency problem. According to NBER, paying dividends instead of holding all profits as retained earnings gives more agency to shareholders instead of managers. By returning profits to shareholders, managers are less incentivized to spend the retained earnings on potentially unsuccessful ventures.