Question

discussion topic :- please describe (along with a rationale) the dividend payout policy you would prefer if you were an investor ?

first person :- As an investor, I would choose the regular dividend policy. Under the regular dividend policy, the company pays out dividends to its shareholders every year. If the company makes abnormal profits (very high profits), the excess profits will not be distributed to the shareholders but are withheld by the company as retained earnings. If the company makes a loss, the shareholders will still be paid a dividend under the policy.

The regular dividend policy is used by companies with steady cash flow and stable earnings. Even though the payment may not be very high, but this will help me prevent loss.

please response to the first person :- (100-150 words ) please think you are the college student.

Answer 1

The policy chosen is not just a matter of preventing loss. It also depends on various other factors like age of the investor, their expectations from the market, their needs, etc. Even in this policy, the investor is not able to prevent loss because if the company is making a loss and distributing dividends, that will result in the reduction of the share price. We should understand that dividend is not something which can be given by the company from somewhere else. It comes from the company's retained earnings only and the retained earnings are already represented in the share price. If the company was making a very good profits by undetaking very good projects which has a potential of making high returns, then also the company should not give dividends. A dividend is basically an extra fund which the managment has and they return it to the investor because they can't find a good use of this fund. Hence, getting a dividend is not always good. Also, getting a dividend also depends on the investor's needs. E.g. a retired person might benefit from the stocks giving dividends as he/she might not have a regular source of income where as young people prefer growth stocks as they have income coming from their jobs etc and are not in need of capital from the stocks.