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Dividends are the income distributed from the profits of a business.

The company will make a decision on how best to use the company's profits. There are a number of ways that a company might distribute its profit. It may repay debt, retain funds for future expansion, or pass dividends on to its shareholders. The decision about whether profit will be distributed as dividends, or retained in the business for expansion, is generally based on the company's growth strategies. A company in a high growth phase is likely to use the profit for expansion, as that's usually a cheaper form of financing. A company in a mature industry is unlikely to have too many growth opportunities that cannot be financed from existing cash flows and, consequently, is more likely to return profits to shareholders.

Dividends from New Zealand companies may have imputation credits attached to them, while tax will need to be paid on dividends received from overseas companies. Fortunately, relative to New Zealand companies, overseas companies, with the possible exception of Australia, pay low levels of dividends. This is to our benefit, because the share price of these overseas companies tends to rise, resulting in a capital free gain, rather than a taxable dividend.