Advantage And Disadvantages Of Dividend Payout Policy Finance Essay

July 18, 2017 History

When a company has a excess of net income, it can be used either wage back the stockholders or reinvest into the concern. The manner that company pay back to stockholders is call dividend payout. In the recent old ages, the figure of companies paying dividends has declined. For illustration, the PSEG Company in the United State, the payout ratio was approximately 67 % in 2004 and fallen to 45 % by 2007.Shows in the graph below: ( hypertext transfer protocol: //www.pseg.com/index.jsp ) This essay will chiefly discourse the advantage and disadvantage about the dividend-paying. What are dividends? Dividends are payment made by corporation to the stockholders. Dividends come from the net income earned by company. There are two ways where company spends the excess of net income, one is to reinvest to the concern and the other is to pay back to the stockholders as dividends. The companies who pay dividends are normally taking no benefit if the reinvest the excess net income back into the concern, under this status dividends are chosen to pay to the stockholders, which is call payout. The signifiers of dividends are variable. The most common one will be the made by hard currency, which is the most common method of sharing corporate net incomes with the stockholders of the company. The 2nd 1 is the stock dividends that is paid in signifier of extra portion and it is counted by proportion, for illustration, if the stockholder owns 100 portions of the stock with 5 % stock dividends, the stockholder can derive 5 more portions. Others like belongings dividends are taken as dividends payout every bit good.

Advantage of dividend payout policy

There is certain sum of people of the right-wing place province that company pays a high dividend payout is of import for investors for the grounds that paying dividends can convert the stockholders about the company ‘s fiscal wellbeing. The higher rate of dividends payout shows better the company operating every bit good as larger figure of net income, which might attracts the investors.

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Dividends are besides attractive for the investors who want to acquire the stable current income easy. & A ; acirc ; ˆ?There is besides a natural patronage of investors, such as the aged, who looking to their stock portfolios for a steady beginning of hard currency to populate on & A ; acirc ; ˆA? ( P456, Richard, 2008 ) . In rule, the stockholders could sell a portion of the portions to derive money even if the company does non pay dividends, but it is more convenience for the investors to acquire the money if companies pay the dividends by cheques. In this instance, the payout policy of hard currency dividends will cut down the cost of dealing every bit good as the incommodiousness for the stockholders selling the portions.

In add-on, the long-run stable dividends payouts could assist the company less affected by the alterations of the dividends. Those companies with long history of stable dividends will be less influenced if the dividends lessening, but will be positively affected when dividends payout additions or even dividends stay the same degree. Furthermore, companies without a dividend history are by and large viewed favourably when they declare new dividends. The dividends proclamation has resulted in a 4 % rise of the stock monetary value harmonizing to the dividend inductions studied by Healy and Palepu ( P448, Richard, 2008 ) .

Many companies have taken the dividends paid back to stockholders as payout policy. For illustration Microsoft, the largest package company in the full universe, has announced their first dividends payout in 2003. The sum of the money has been divided into two signifiers of dividends, one was erstwhile dividends and the other was stock dividends paid quarterly installments by a unit as per portion. ( P457, Richard, 2008 ) .

Disadvantage of dividend payout policy

First, the extremist province that dividends payout can be heavier than capitals gain when revenue enhancement of dividends is larger than the capital additions. Under this status, company should set the spare net income back into the concern by repurchase portions. It makes sense for the grounds that the capital additions have a revenue enhancement advantage. When companies use the money to buy back the portion, the income will be larger because with the lower rate of revenue enhancement on capital net incomes, comparing to dividends payouts to stockholders with higher rate of revenue enhancement on dividends. In the banking industries, a portion of Bankss have stopped paying dividends to stockholders in 2009, harmonizing to the Capital Report. In the interim, there are 202 houses have cut their dividends and 74 of which paid none at all ( Web1 ) .

Second, the degree of dividends payout can reflect the information about the assurance of the direction from the company in the hereafter, which will hold an influence to the stock monetary value. Generally, companies that pay dividends are directing a message to the market that their net incomes are existent which will ensue in the investors comfort about their investing. On the other manus, one time the companies decide to cut the dividend it is besides directing the information that they can non keep the dividends. However, the company might be able to rip off on their operation by exaggerating the earning to pull investors, but it is hazardous in the long term because the existent status of the company will non hold sufficient money to pay the dividends. The effect will be dearly-won if the companies choose a high dividend without acquiring adequate net income. Most directors will non alter the dividends without consideration about the operation of company, but they will increase the dividends merely if they are confident it can be maintained.

Third, the consideration of a dividend policy might be irrelevant because investors have the ability to make their ain dividends. It means that investors can be able to do their ain & A ; acirc ; ˆ?dividend & A ; acirc ; ˆ™ by seting the investing into different countries. For illustration, the investors who prefer a stable income are more likely to set their money into the bonds with the stable involvement rates. In the instance, the stock with dividends pay back will lose the advantage because of the flexible value. Investors who have invested to the bonds will non pay attending to the dividend policy of a peculiar company.

Decision:

Taking the dividend payout policy can pull certain sum of investors, and it is convenience for those investors who require stable and simple income. But dividends sometimes have revenue enhancement disadvantage if the revenue enhancement rate of dividend is higher than capital additions. And dividends are normally more flexible, comparing to the involvement rates of bonds. It is of import for a company to believe whether to take the dividend payout policy by sing the assets, net incomes, investings chances, market value and other factors about the company.

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