The dividend irrelevance theory suggests that a company’s dividend policy should not affect the price of its shares, as investors can always sell shares to generate cash flow. Supporters argue that investors can benefit regardless of the dividend policy, while detractors argue that it can impact investment decisions and taxes.
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. Furthermore, the terms of that dividend policy should not influence the price of shares 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 a certain amount of cash flow. As with most investment theories, dividend irrelevance theory has its share of supporters and detractors.
Among those who find the dividend irrelevance theory to have merit, the common view is that many investors use dividend payments to buy more shares, thereby increasing the investor’s holdings in the company. The same general effect could be achieved if no dividends are issued, and those funds are invested in various projects and activities that ultimately increase the value of shares already owned by investors. Since the investor will benefit in either scenario, he or she should not worry about the company’s dividend policy one way or the other. In the end, the impact will be the same.
For investors who disagree with the dividend irrelevance theory, one point of contention is that by not considering the type of dividend policy a given company follows, the investor is not given the opportunity to make investment decisions that are in line with your financial goals. For example, if the investor wants to create a steady cash flow from investments that can be used for everyday expenses, buying stocks where dividends are paid consistently will go a long way. measure to establish the desired cash flow. If the investor does not consider the dividend policy before purchasing the shares, there is a good chance that this objective will not be met, even though the value of the shares may increase as the company diverts resources to expanding the business.
Detractors also point out that investors typically closely watch the dividend policy associated with potential investments, simply because there are tax implications. This means that an investor must determine how the policy related to a given investment will increase or decrease the taxes due on the investments when taxes are due. If the policy is likely to increase taxes without the opportunity to generate a return sufficient to make the acquisition worthwhile, then the investor will want to look at another stock and determine whether the dividend policy associated with that security would be more favorable. If the investor follows the idea behind the dividend irrelevance theory, there may be a large and quite unexpected tax burden that needs to be resolved. Again, proponents point out that this can be handled by selling shares of appreciated value, effectively offsetting the additional taxes.
Smart Asset.
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