COMMERCE 3FA3 Study Guide - Midterm Guide: World Oil Market Chronology From 2003, Fiduciary, Dividend Yield
Cash Dividends and Dividend Payment
A dividend is a payment made out of firm earnings to owners in the form of cash or a stock.
Cash dividends are visible payouts, but there are less visible effects when taxes payable is hidden in a tax bill
and minute share price falls are masked by daily trading
•
A distribution is a payment made out of sources other than current or accumulated earnings.
Types of Dividends
Increasing dividend can be a good signal is rationale is acceptable
○
Indicates there is no reason to discontinue/reduce dividend which would otherwise send a bad signal,
suggesting income targets won't be met
•
Extra cash dividends may or may not be continued, similarly to a special dividend which is seen as a one-time
payment
•
Liquidating dividends occur when assets or business divisions are sold, also sending poor signals
•
Regular cash dividends are cash payments made by a firm to its owners on a regular basis, four times a year, reducing
cash and retained earnings.
Board of directors passes resolution 1. to pay dividend on 4. to all holders of record on 3. on declaration date -
until now, dividends are not a liability
•
Ex-dividend date two business days 2. before date of record establishes entitlement
•
Holders of record on 3. date of record receive dividend
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Date of payment 4.
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Dividend Payment Chronology
Does Dividend Policy Matter?
Companies that reinvest should have higher share growth and overall growth and theoretically companies that
pay dividends are lowering their value
•
The reality is that dividend paying companies perform better and have better share price growth as a result of
the prevalence of larger, stable, positive cash flow companies paying dividends with lower likelihood of failure
and bankruptcy, pressure on management, and cash limits for future investments
•
Dividend policy is irrelevant allowing for time value and trade-offs
○
An increase in a dividend is exactly offset by a decrease elsewhere, leading to an et time value of zero
•
Dividend Conundrum and the Irrelevancy of Dividend Policy
Homemade Dividends
Seen in automatic dividend reinvestment plans (ADPS/DRIPS)
•
Benefits by leading to a lower tax rate within Canada
•
Stripped common shares are a form of common stock where capital gains and dividends are repackaged and
sold separately
•
Homemade dividends consist of the idea that dissatisfied individual investors can undo corporate dividend policy by
reinvesting dividends or selling shares.
Real-World Factors Favouring a Low Payout
Individuals face lower tax rate due to dividend tax credit such that capital gains are taxed at 50% the marginal
rate when realized
•
Capital gains are therefore subject to lower taxes than dividends
•
Alternatives to dividends include: additional capital budgeting projects, repurchasing shares, acquisitions,
purchasing financial assets
•
Taxes
The value of stock decreases as new stock is sold, and since there is a higher expense to having a high payout,
there is an inclination towards having a lower payout
•
Flotation Costs
Dividend Policy
March 8, 2018
1:57 PM
Managerial Finance Page 1
Document Summary
A dividend is a payment made out of firm earnings to owners in the form of cash or a stock. A distribution is a payment made out of sources other than current or accumulated earnings. Cash dividends are visible payouts, but there are less visible effects when taxes payable is hidden in a tax bill and minute share price falls are masked by daily trading. Regular cash dividends are cash payments made by a firm to its owners on a regular basis, four times a year, reducing cash and retained earnings. Indicates there is no reason to discontinue/reduce dividend which would otherwise send a bad signal, suggesting income targets won"t be met. Increasing dividend can be a good signal is rationale is acceptable. Extra cash dividends may or may not be continued, similarly to a special dividend which is seen as a one-time payment. Liquidating dividends occur when assets or business divisions are sold, also sending poor signals.