Question

An established corporation currently pays out 50% of earnings as dividends. The CFO asks you whether paying dividends to shareholders other than corporations is advantageous. How do you respond?

Answer 1

When a company wants to pay out its earning in form of dividend it is placed higher in the eyes of shareholders as compared to other companies or Corporation. The reason for this is usually investors prefer dividend as it is treated as fixed income for the investor which is of relatively low risk as compared to to selling of shares in the market.

Moreover shareholders preferred dividend because of low taxability as compared to capital gain on selling of shares which is taxed at higher rate. Also for claiming dividend the shareholders need not sell the shares and therefore can be a part of the company and its shareholding as compared to selling of shares wherein the shareholders need to sell the shares for the capital gain.

Also dividend paying company gives a positive picture to the public regarding their growth in the market and future perspective as compared to other companies are cooperation which do not pay dividend and accumulate their earnings in form of retained earnings but such earnings do not come in the eyes of shareholder as not all the public read financial statement given by the company.

Therefore my recommendation to the CFO of the corporation will be to pay out the dividend to the shareholder and it is more advantages for the company as compared to other Corporation who do not pay dividend.

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