Question

Describe the importance of a dividend. What are some of the advantages and disadvantages to the stock holder?

Answer 1

Dividends are a share of company's profits that are paid out to shareholders of the company.
The importance of dividend is that it helps the company to pay of excess cash to its owners, which is not required by the company for its expansion, goals and objectives.

It's helps in better utilisation of the excess cash by giving it to its rightful owners.

Advantages:
1. Dividend income in most countries is tax-free at the hand of shareholders.
2. Constant source of income in stock market.
3. It represents/signals that company has strong financial statements.

Disadvantages:
1. Company run out of cash for attracting shareholders.
2. If company pays dividend in 1 year and fails to pay in other years, in that case investors worry about the future of the company as it shows inconsistency in financial position. Then they starts selling stock which cause in downward pressure on the stock price and negativity about the company.