Question

“Since investors are able to create homemade dividends, managers should not be rewarded for adopting high dividend payout policy.” Critically evaluate this statement in the light of both the theories of dividend policy and practical considerations.

Please write one page. Thank you

Answer 1

Dividend Policy: It is a practice that the management of the firm follows in making dividend payout decisions regarding the size & pattern of the dividend policy.

It can also be seen as the plan of action that the management follows before making dividend related decisions. policy decides the portion of earnings that they want to distribute and another portion to keep as retained earnings.

There are arguments for and against the dividend policies and the managements decision towards the distribution of earnings as a dividend. Lets see their points to critically examine above statement.

(1). Arguments against Dividend Policy:

• What some analysts argues is that dividend policy is irrelevant because most of the investors get "homemade dividends", this is because of the asset allocation. if they want their portfolio to have more periodic earnings they allocate more assets in debt securities which gives them fixed periodic earnings without the worry of the dividend policy.
• What other arguments suggest that no dividend or little dividend is more favourable for the investors, as dividend attracts more taxes than the capital gain. If a company has prospects for future expansion and they are investing in it to expand and not paying dividend it will again increase the stock prices because value of the company has also increased. Again if stock is trading it will be considered as capital gain for nvestors and on which they have to pay less taxes than the dividend payout.

(2). Arguments for Dividend policy:

• Those who supports dividend policy argues that the dividend payout ensures the firms financial stable financial performances. And past data also witnesses the same thing.
• Dividend payout stocks are also considered as an attractive investments among investors because it gives income to the investors.
• So these are the arguments which critically examines the above statement and the dividend policies of the management.