Advantage And Disadvantages Of Dividend Payout Policy Finance Essay

Advantage And Disadvantages Of Dividend Payout Policy Finance Essay When a company has a surplus of profit, it can be used either pay back the shareholders or reinvest into the business. The way that company pay back to shareholders is call dividend payout. In the recent years, the number of companies paying dividends has declined. For example, the PSEG Company in the United State, the payout ratio was about 67% in 2004 and fallen to 45% by 2007.Shows in the graph below: (http://www.pseg.com/index.jsp) This essay will mainly discuss the advantage and disadvantage about the dividend-paying. What are dividends? Dividends are payment made by corporation to the shareholders. Dividends come from the profit earned by company. There are two ways where company spends the surplus of profit, one is to reinvest to the business and the other is to pay back to the shareholders as dividends. The companies who pay dividends are usually taking no benefit if the reinvest the surplus profit back into the business, under this condition dividends are chosen to pay to t he shareholders, which is call payout. The forms of dividends are variable. The most common one will be the made by cash, which is the most common method of sharing corporate profits with the shareholders of the company. The second one is the stock dividends that is paid in form of additional share and it is counted by proportion, for example, if the shareholder owns 100 shares of the stock with 5% stock dividends, the shareholder can gain 5 more shares. Others like property dividends are taken as dividends payout as well. Advantage of dividend payout policy There is certain amount of people of the rightist position state that company pays a high dividend payout is important for investors for the reasons that paying dividends can convince the shareholders about the company’s financial well-being. The higher rate of dividends payout shows better the company operating as well as larger number of profit, which might attracts the investors. Dividends are also attractive for the i nvestors who want to get the stable current income easily. à ¢Ã¢â€š ¬Ã…“There is also a natural clientele of investors, such as the elderly, who looking to their stock portfolios for a steady source of cash to live onà ¢Ã¢â€š ¬Ã‚  (P456, Richard, 2008). In principle, the shareholders could sell a part of the shares to gain money even if the company does not pay dividends, but it is more convenience for the investors to get the money if companies pay the dividends by checks. In this case, the payout policy of cash dividends will reduce the cost of transaction as well as the inconvenience for the shareholders selling the shares. In addition, the long-term stable dividends payouts could help the company less affected by the changes of the dividends. Those companies with long history of stable dividends will be less influenced if the dividends decrease, but will be positively affected when dividends payout increases or even dividends stay the same level. Furthermore, companies with out a dividend history are generally viewed favorably when they declare new dividends. The dividends announcement has resulted in a 4% rise of the stock price according to the dividend initiations studied by Healy and Palepu (P448, Richard, 2008).