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Dividend Payout Essay

893 words - 4 pages

Firms’ Earnings Shouldn’t Be All Used As Dividend Payout
1.0 Introduction
A dividend is termed as a portion of a firm’s earnings that is returned to its shareholders. Dividends offer a further motif for investors to hold or even increase their investments. A lot of companies, mature or young, large or small, pay stable dividend. It is true that high dividend yield is important for current investors because it indicates, to some degree, a firm’s financial well being, but paying 100% of its earnings as dividend is not financially wise. Instead of paying dividends, fluid cash is quite essential for a company’s current operation, growth and expansion. Besides, dividend paying is no longer ...view middle of the document...

To some degree, firms can cut down dividends or even stop paying after all especially while confronting with currently increasingly more fierce competition that requires large potential cash flow for future investment (Hough, 2012). Liquid cash, particularly to some start-up companies, bouncing back companies and expanding companies, is extremely crucial in terms of purchasing equipment, enlarging personnel force, acquiring competitors, buying back stocks, etc. It is true that there are some firms that might always believe in increasing shareholders’ value by offering a valuable asset as a return to their investments, but this huge part of cash can be transferred into other uses if paying dividends doesn’t make enough economic sense (Schwartz, 2013). By the way, buying back stocks has become a primary use by senior management teams from major firms to better use their earnings.
* Increasing Irrelevance of Dividend Payout to Financial Health
Secondly, days are gone when potential investors consider companies’ financial health only based on its paying dividends. Nowadays, a dividend is no longer the only signal of one firm’s health or safety. As holding a diversified portfolio, investors’ investment decisions won’t be only made upon dividends (Schwartz, 2013). As a result, a firm’s management team won’t rely on maintaining a financial healthy appearance by only paying dividends to attract further investment. PG&E can be a perfect example for this argument. It had a quite long history of paying a dividend. However, it was suspended for four consecutive years after its stock price crashed in the 2001 to 2002 bear market. What was weird was that its dividend...

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