Why does Microsoft pay dividends instead of reinvesting it back into the company?
IMHO, any publicly held company (like Microsoft) has a fiduciary responsibility to return profits to the shareholders. This is done with increased Valuation (increase in stock price), and distribution of dividends.
Watching a company reward the CEO and management team handsomely while ignoring the shareholders leaves me cold, and I avoid investing in these companies. I also avoid companies that don’t treat/compensate employees well, and companies that are not good citizens (ie: pharmaceuticals that raise prices to milk a captive group of customers dependent on their medicines).
Companies that distribute dividends regularly are know as dividend aristocrats. You can read about them here: S&P 500 Dividend Aristocrats — Wikipedia
Microsoft does invest money in the company, in new product development, market strategy, manufacturing, etc., but that is budgeted with funds that are not marked for dividends. In fact, cutting a dividend is a policy that can get companies punished by the market place. GE cut their dividend to increase their insurance reserves, and got soundly trashed by the market GE slashes dividend to a penny to fix debt-riddled balance sheet, and GE CEO admits regular investors have fled the stock since he cut the dividend to a penny.
I hope this gives you some insight, and you have stocks that give you ongoing (and increasing) dividends.
Disclaimer: I am not a financial advisor, but I do write about dividend investing in my blog. Make sure you consult with your investment, legal, and accounting advisers before you make investing decisions! — what works for me may not work for you.
Thanks for the question, and thanks for reading my answer!— Alan
(My blog: The Chenkin Report)