Question

The dividend debate is inconclusive and still on-going in the corporate world. In your view, briefly

discuss some real world factors that may support the payment of high and low dividends.

Answer 1

In Favor of Dividend

• The investors are loyal to a company that pays stable dividends. For many investors, dividend yield is a source of earnings
• Investors are happy with dividend earnings rather than capital gains alone
• Some companies in mature industries are in stable growth. They have very few growth opportunities, so they distribute profits to share holders
• Many promoter driven (Also government undertakings) companies are forced by promoters (governments too) to issue more dividends.
• Analysts also find it easier to value companies which pay are a regular dividend.
• Dividends are real earnings for an investor. Capital gains are momentary
• In many countries, dividends are not taxable in shareholders hand

Against Dividend

• Paying dividends result in the reduction of usable cash which may limit the company’s growth. The company will have less money to invest in the business growth.
• Dividend is a very small amount of investors capital. Many times it goes unnoticed by the investors.
• Per share dividend is a small amount. But, for the company, it is a large amount that can be put towards long term growth of the company
• Large amount of Dividend distribution tax is paid by companies, reducing the actual dividend received by the investors