Dividend Policies
The dividend irrelevance theory is a concept that is based on the premise that the dividend policy of a given company should not be considered particularly important by investors. Further, the terms of that dividend policy should not have any bearing on the price of the shares of stock issued by that company. With this particular financial theory, the idea is that investors can always sell a portion of their shares if they want to generate some amount of cash flow. As with most investment theories, the dividend irrelevance theory has its share of supporters and detractors.
Among those who find that the dividend irrelevance theory has merit, the usual stance is that many investors use dividend payments to purchase more shares, thus increasing the holdings that the investor has in the company. The same general effect could possibly be achieved if dividends are not issued, and those funds are invested in various projects and activities that ultimately increase the value of the shares already owned by investors. Since the investor stands to benefit from either scenario, he or she should not be concerned about the company’s dividend policy one way or the other. In the end, the impact will be the same.
For investors who do not agree with the dividend irrelevance theory, one point of contention is that by not considering the type of dividend policy that a given company follows, the investor does not have the opportunity to make investment decisions that are in line with his or her financial goals. For example, if the investor wants to create steady cash flow from investments that can be used for day to day living expenses, buying securities where dividends are paid on some sort of consistent basis will go a long way toward establishing that desired cash flow. If the investor does not consider the dividend policy prior to buying the shares, there is a good chance that this goal will not be met, even though the value of the stock may increase as the company diverts
Among those who find that the dividend irrelevance theory has merit, the usual stance is that many investors use dividend payments to purchase more shares, thus increasing the holdings that the investor has in the company. The same general effect could possibly be achieved if dividends are not issued, and those funds are invested in various projects and activities that ultimately increase the value of the shares already owned by investors. Since the investor stands to benefit from either scenario, he or she should not be concerned about the company’s dividend policy one way or the other. In the end, the impact will be the same.
For investors who do not agree with the dividend irrelevance theory, one point of contention is that by not considering the type of dividend policy that a given company follows, the investor does not have the opportunity to make investment decisions that are in line with his or her financial goals. For example, if the investor wants to create steady cash flow from investments that can be used for day to day living expenses, buying securities where dividends are paid on some sort of consistent basis will go a long way toward establishing that desired cash flow. If the investor does not consider the dividend policy prior to buying the shares, there is a good chance that this goal will not be met, even though the value of the stock may increase as the company diverts
Links: Dividend relevance theory In Dividends, Finance, MBA on October 27, 2010 at 7:48 pm