Essays on Role of Dividends and Their Effect on Shareholder Wealth Report

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The paper "Role of Dividends and Their Effect on Shareholder Wealth" is a great example of a report on finance and accounting. Dividends play a major role in the financial operations of any given Company, particularly on the shareholder's wealth. Dividends can either increase the shareholder's wealth or decrease it depending on its effects. The dividend policy of a company relates to the form of dividends and the retention of profits for future use in the business. The two objectives of dividend policy distribution of the dividends and retention of earnings for growth are in conflict. The dividend policy of a company affects: - Long term financial decisions Shareholder’ s wealth.

(Michaely, 1999) Discussion The dividend policy can be formed in view of the following considerations. Where are the shareholders' preferences? Do they want dividend income or capital gains? What are the financial needs of the company? How much should be paid out of dividends Should a company follow a stable dividend policy What should be the form of a dividend? The dividend policy of a company is decided on the basis of the above considerations. The efforts should be made to bring a balance between the desires of the shareholders and the needs of the company.

Shareholders may be interested either in dividend income or capital gains. For example, a wealthy shareholder in a high-income tax bracket may be interested in capital gain instead of dividend income. On the other hand, the retired shareholders may be more interested in cash dividends. Similarly, the majority of shareholders like unit trust, insurance companies among others also prefer cash dividends because they have to pay a return to their deposition. The small shareholders mostly do not have a specific objective to buy shares. They may buy shares to receive dividend income or net capital gain.

The directors should therefore adopt a dividend policy, which fulfills the requirements of different classes of people. (Starks, 2000) A high dividend payout might be harmful to the long term because in this case, profits cannot be used for the further expansion of the company. However, this policy will be beneficial to raise share prices in the short run. If the dividend policy is decided in view of the long-term financing requirements then the company will pay high dividends only when the firm does not have profitable investment opportunities.


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