Page 196 - 5.2 i. Manac Finance ITC Summarised Notes
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THE DIVIDEND DECISION
Practical factors affecting the dividend decision
Future investment opportunities
• A firm that has many future investment opportunities with high rates of return
should have lower payout ratios.
• If existing stockholders want to retain control they will not want to issue new equity.
Hence, they will prefer to retain profits for investment purposes, giving a lower
payout ratio.
• Also, if a company needs to raise new equity finance by issuing shares it will incur
flotation costs, which means that it would have been better not to pay the higher
dividends initially.
Clientele effect / shareholders preference
• It is important for a firm to have a dividend policy appropriate for its activities.
According to the clientele effect investors will then choose investments that have a
dividend policy that meets their particular requirement.
• Investors, who are in pursuit of high-growth shares, would prefer a company that
pays no dividends. Other investors would rather receive a known dividend payment
today (bird-in-the-hand) than wait for uncertain capital growth (2-in-the-bush).
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