Question

List and describe two reasons why a low dividend payout might be preferred and two reasons why a high dividend payout might be preferred.

Answer 1

2 reason why a low dividend payout might be preferred:

• Funding growth through retained earnings: Dividend which is paid from retained earnigs can be reduced and this amount can be used for future investments of the company. Such critical investments can give the much needed capital appreciation of stock value which ultimately benefit shareholders.
• Unexpected financial trouble: Equity savings capital due to low dividend payout can act as a buffer for the company during its severe cash crunch, liquidity issues etc.

2 reasons why a high dividend payout preferred:

• Shareholders are protected: high dividend protects the share holders from any significant price drops of the stock and is a constant stream of income
• Consistently dividend payment signifies stability of the company: Many investors who are conservative prefers a company which pay consistent highe dividend payout compared to random dividend paying companies. Also high dividend increase the market value of the company as investors are attracted due to the prospective dividend yield