When investors prefer low dividend payout and what is the relation between dividend payout and cash flow (what will increase and what will decrease when using low dividend payment?)
Dividend payout ratio refers to the amount of earnings of a particular company that seeks to issue out to its investors in the form of cash dividends. Dividends payouts may vary depending on the industry and a low dividend payout may signify a good thing or a bad thing. Investors who may opt for a low dividend payout may mean that they are willing to allow the company plough back its annual earnings for the purpose of capital growth of the company they have invested in as well as capital gains incur lower tax rates. It may show that the investors are willing to forgo part of their dividends to generate greater returns which lead to higher stock market prices (Sedzro 2010). On the bad side, it may mean that the company does not have enough capital to pay dividends to its investors. The relationship between dividend payout and cash flow is that a company that pays higher dividends may seem to be having a greater cash flow to meet its daily operational needs but a company paying low dividend payout may seem to be having a low cash flow hence, the company needs to retain the dividends for operational needs. This therefore, translates to an increase in cash flow and a decrease in dividend payout when using low dividend payout (Sedzro 2010).Order now
What is the relationship between tax and dividend payout (using low dividend payout) what will increase and what will decrease? And does tax benefit shareholder and create value to the firm?
One of the disadvantages of quoted companies is that they are subject to double taxation where the annual earnings are taxed as well as the dividends paid out to its investors depending on how much revenue was generated and the amount of dividends paid out. This translates to the higher the tax rate the lower the dividend payout as likewise, the lower the tax rate, the higher the dividends payout (Sedzro 2010).
When using the low dividend payout, the tax rate will be low as the company’s capital gains will be charged at a lower tax rate, this will translate to dividend payout to the investors also being low as the other percentage of the capital is retained by the company for expansion and growth. When tax rate is high, the investor will receive low dividends payouts which are ultimately unfavorable to the shareholders. The company when taxed highly does not benefit the firm as the earnings taxed could have been ploughed back into the business and used for growth, however, ability to pay the required cash creates goodwill and a positive image of the company to the investors who are more likely to invest more as well receive foreign investments (Sedzro 2010).
When investors prefer high dividend payout and what is the relation between dividend payout and cash flow (what will increase and what will decrease when using high dividend payment?)
When investors demand high dividend payout, it may signify either that the company is able to pay the high dividends to its investors but its stock prices present a poor state of affairs as they are very low or depressed or that the ability to pay the high dividend payout may mean that the company is very mature and has a number of growth opportunities to its disposal. A higher dividend payout leads to low cash flow while a low dividend payout leads to a high cash flow. When a high dividend payout is used, it may translate to a decrease in cash flow and an increase in dividend payout when a high dividend policy is used. This is as a result of lacking enough working capital at various intervals in its operations since most of its capital was used in paying out dividends (Sedzro 2010).
Why firm might pay its shareholders higher dividends even if it means the firm must issue more shares of stock to finance the dividend payments? How this will benefit the investor?
A firm that is at ease in issuing high dividend payout to its current shareholders may be in view that the company has alternative sources of finance but still goes ahead and uses the finance from the newly issue stock so as to attract more shareholders. By receiving high dividend payouts and issuing more shares to the public may signify to the shareholders that the company is performing exceedingly well and in return, encourage the shareholders to purchase more shares hence, investing more into the company (Sages & Grable 2010). The excess capital from the increase in investment from the shareholders enables the company to continue expanding and purchasing more resources for growth. Receiving higher dividend payout may enable the investor increase his investment in the company in the hope of receiving even a high dividend payout after the next fiscal year (Sages & Grable 2010).
Explain how an individual preferring high current cash flow but holding low dividend securities can easily sell off shares to provide necessary funds. And how an individual desiring a low current cash flow but holding high dividend securities can just reinvest the dividend. Is this way a good way to create value to shareholders? Yes or no? Explain?
Where shareholders are paid high dividends, the amount of cash flow in the company is likely to be low as more annual earnings are used up to pay the dividends, however, where the dividends paid are low, the cash flow in the company is likely to be high. Stocks are usually set at lower prices after the dividends have been paid out, due to the price reset, the stock may either rise or fall in the market trading. Since the dividend payout fundamentally affects the stock prices, the forces affecting the market trading will as well influence stock prices. Therefore, where the stock prices rise, the shareholders can sell the share off to raise the necessary funds as the cash flow will most certainly increase despite the low dividend securities. An individual who desires a low cash flow may reinvest the high dividend securities but in unison require the company to invest the reinvested high securities hence reducing the amount of capital available and in return, bring forward a low current cash flow. It is not a good way to create value for stocks since the company requires ample working capital to continue in their operation which is evident in maintain a high share price (Haw& Lee et al 2011).
What is the tax advantages and disadvantages of a low dividend payout?
Once a company issues a low dividend payout to its shareholders, the tax rate enforced on its capital gains is considerably low as compared to issuing a high dividend payout. The company will be able to use the excess capital to expand the company and facilitate growth. The duration between tax declaration and tax payment is long so the company may reinvest the amount meant for tax payment back into the business to generate more capital for the business. Despite receiving a low dividend payout, since the tax paid by the business is low, and there is more capital available, the probability of growth of the company is high leading to greater returns in future compared to a company issuing high dividends to its shareholders (Nam & Zhang et al 2010). The tax disadvantage of a low dividend payout is it leaves the company with too much cash at hand leading to increase in the cost of capital. Due to the basic fact that interest income is taxable, a company holding a large amount of cash reserves leaves the investors at a disadvantaged position. In short, where a company receives low taxation as a result of low dividend payout leaves the company with a large cash reserve which increases the cost financing (Nam & Zhang et al 2010).
Why might some individual investors favor a high dividend payout?
Some individual investors may be in favor of a large dividend payout since they would like to see a considerable amount of returns in their investment. This is more so with those investors that have invested heavily in one particular company and want to see high returns. It may as well be as a result of a the probability of the company changing management hence, the investors may opt to have a high a dividend payout as they do not know how the restricting may affect the performance of the company in future. The investors may as well want a high dividend payout if they want to sell their stake in the company due to fears of the market forces impacting negatively on the performance of the company in future (Haw& Lee et al 2011).
Why might some non-individual investors prefer a high dividend payout?
This may be as a result of a potential collapse or receivership of the company invested in that may lead to non- individual investors wanting a high dividend payout. It may also be brought forward where there are wrangles within the company management that may bring a lot of uncertainty into the future of the company. The non- individual members may want further to invest in the company when the share prices are low in the hopes that they would receive a high return on their investment once the share prices rose in future (Haw& Lee et al 2011).
Sages, R. A., & Grable, J. E. (2010). Financial Numeracy, Net Worth, and Financial Management Skills: Client Characteristics That Differ Based on Financial Risk Tolerance. Journal of Financial Service Professionals, 64(6), 57-65.
Haw, I., Ho, S. M., & Lee, A. (2011). Corporate Governance and Earnings Management by Classification Shifting. Contemporary Accounting Research, 28(2), 517-553.
Nam, J., Wang, J., & Zhang, G. (2010). The Impact of the Dividend Tax Cut and Managerial Stock Holdings on Corporate Dividend Policy. Global Finance Journal, 21(3), 275-292.
Sedzro, K. (2010). A Unifying Approach for Comparing One-Time Payouts and Recurring Dividends. Global Journal of Business Research, 4(2), 141-154.