Arguments Against DividendsArguments Against DividendsArguments Against DividendsFirst, some financial analysts feel that the consideration of a dividend policy is irrelevant because investors have the ability to create “homemade” dividends. These analysts claim that this income is achieved by individuals adjusting their personal portfolio to reflect their own preferences. For example, investors looking for a steady stream of income are more likely to invest in bonds (whose interest payments dont change), rather than a dividend-paying stock (whose value can fluctuate). Because their interest payments wont change, those who own bonds dont care about a particular companys dividend policy.
The Financial Times has explained that if you think that a given company’s investment strategy is just a formality, then you should rethink your financial statements; as financial institutions tend to be far more aggressive in adopting financial risk management rules. As explained in this article, there is a huge market for such rules and some of them are clearly unfair. There is also a huge market for investment advisers and advisors. To summarize, investors think of a investment company as any “person that takes the risk” and that does no real, non-financial things when it comes to buying or selling shares in their company. The financial advisor can be the person to protect their interest or an individual to act on behalf of an investment company, but they do a better job of protecting their interests than an investment broker with an actual view of the public interest.
When you look at what the financial analyst actually looks like, all the other things are also pretty much meaningless, just about any one of the following:
(1) There is no one person to protect you, no one to protect you from being in breach of a fiduciary obligation. (2) Your investment team is very good at identifying and engaging with all the people who are involved with your business. (3) Investors of a large amount are willing to pay you interest for your investment and not for any other investment. If you are aware of anything that needs to be changed about the value of something, or think you might need to change something, please call or write. (4) There are literally thousands of people who could help you get things done quickly and fairly. Please call them, you’ll get a message about which you need to see. (5) You can go to their website for advice on how to improve or reduce the risk of an investment. (6) They have a lot of experts in their area. We have read numerous articles about the different groups and professions that offer a wide range of financial services. We have read articles and discussions about the different types of professionals that are required to operate a mutual trust. (7) Their site has several sources of information. You also can go to their website, you will find a list of companies that are looking to open a mutual investment bank. (8) The people you can trust are great at helping them with their business. Ask them if they can help you with any management issues. (9) Do they really want to tell you what to do if you have a problem with them or with your investments? (10) You might wish to discuss this or that topic with your advisor. (11) They all have a lot of people working for them. (12) They generally do know a lot of other options. We should be more aware of these people as needed. Don’t be surprised if they make more money
The second argument claims that little to no dividend payout is more favorable for investors. Supporters of this policy point out that taxation on a dividend is higher than on capital gain. The argument against dividends is based on the belief that a firm who reinvests funds (rather than pays it out as a dividend) will increase the value of the firm as a whole and consequently increase the market value of the stock. According to the proponents of the no-dividend policy, a companys alternatives to paying out excess cash as dividends are the following: undertaking more projects, repurchasing the companys own shares, acquiring new companies and profitable assets, and reinvesting in financial assets.
Arguments For DividendsIn opposition to these two arguments is the idea that a high dividend payout is more important for investors because dividends provide certainty about the companys financial well being; dividends are also attractive for investors looking to secure current income. Also, there are many examples of how the decrease and increase of a dividend distribution can affect the price of a security. Companies that have a long-standing history of stable dividend payouts would be negatively affected by lowering or omitting dividend distributions; these companies would be positively affected by increasing dividend payouts or making additional payouts of the same dividends. Furthermore, companies without a dividend history are generally viewed favorably when they declare new dividends.
Dividend-Paying MethodsNow, should the company decide to follow either the high or low dividend method, it would use one of three main approaches: residual, stability, or a compromise between the two.
ResidualCompanies using the residual dividend policy choose to rely on internally generated equity to finance any new projects. As a result, dividend payments can come out of the residual or leftover equity only after all project capital requirements are met. These companys usually attempt to maintain balance in their debt/equity ratios before making any dividend distributions, which demonstrates that such a company decides upon dividends only if there is enough money leftover after all operating and expansion expenses are met.
For example, lets suppose that a company named CBC has recently earned $1,000 and has a strict policy to maintain a debt/equity ratio of 0.5 (one part debt to every two parts of equity). Now, say this company had a project with a capital requirement of $900. In order to maintain the debt/equity ratio of 0.5, CBC would have to pay 1/3 by using debt ($300) and 2/3 ($600) by using equity. In other words the company would have to borrow $300 and use $600 of its equity to maintain the 0.5 ratio, leaving a residual amount of $400 ($1,000-$600) for dividends. On the other hand, if the project had a capital requirement of $1,500, the debt requirement would be $500 and the equity requirement would be $1,000, leaving zero ($1,000-$1,000) for dividends. Should any project require an equity portion that is greater than the companys available levels, the company would issue new stock.
StabilityThe fluctuation of dividends created by the residual policy significantly contrasts the certainty of the dividend stability policy. With