Question

Question: How would you answer this students post with a paragraph or two with reference.

A company's net profits can be allocated to shareholders via a dividend, or kept within the company as retained earnings (Investopedia, n.d.). Since dividends are from net profits (or retained earnings) this helps explain why a company may issue or not issue dividends; meaning it depends on what the business intentions or strategic plan is (if they are in the build up or start up stage or want to invest in something large a company might not issue a dividend so they can invest that capital, or if they are larger company with a history of net income and retained earnings it may use a dividend as a means to reward their "owners" the stockholders). Also to consider a business does not have to issue dividends. It also may depend on how the board perceives growing income, either by stock price or thru dividends paid back when earnings are good. For example dividends "can" be taxed differently than other means of income meaning it may benefit the stockholders to receive that "income" thru dividends. Also to consider is, Economists Merton Miller and Franco Modigliani argued that a company's dividend policy is irrelevant, and it has no effect on the price of a firm's stock or its cost of capital (Investopedia, n.d.). Although not perfect, the theory states one can have the same effect either by dividend or use of the stocks to make the same effect, although this does not include items such as tax breaks, etc.

Adam Ketch

Reference:

Investopedia (n.d.) Dividend definition. Retrieved from http://www.investopedia.com/terms/d/dividend.asp

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