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Chapter 5
Practical dividend policy considerations
2.1 The interests of shareholders
If the shareholders don't feel that the business's dividend policy meets their
expectations, they will sell their shares, perhaps causing the share price to fall.
Two important considerations:
Clientele effect The bird-in-the-hand-argument
Companies should follow a A dividend is certain and some
consistent dividend policy so as to investors prefer a certain dividend
ensure that they gather to them a now, to the promise of uncertain
clientele of shareholders who like future dividends (arising out of
that particular policy. retaining and reinvesting earnings).
In the real world, investors will have This is the case even if capital gains
a preference for dividends or capital would be more tax efficient.
gains.
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