Chapter 17 (Dividends and Payout Policy)

There are 4 types of dividends

1. regular cash dividends 2. Extra dividends 3. Special dividends 4. Liquidating Dividends

True or False: Dividends are irrelevant

False Duh Clearly, investors prefer higher dividends to lower dividends at any single date if the dividend level is held constant at every other date

Dividend Payment: A chronology

1. Declaration Date 2. Ex-dividend date 3. date or record 4. date of payment

Regular cash dividend

a cash payment made by a firm to its owners in the normal course of business, usually paid four times per year.

Declaration Date

a date which the board of directors passes a resolution to pay a dividend

Dividend

a payment made out of a firm to its owners, in the form of either cash or stock

reverse split

a stock split in which a firm's number of shares outstanding is reduced

stock split

an increase in a firm's shares outstanding without any change in owner's equity

Date of payment

the date on which the dividend checks are mailed

Ex-dividend date

the date two business days before the date of record, establishing those individuals entitled to a dividend

Date of record

the date which a holder must be on record to be designated to receive a dividend `

Information content effect

the market's reaction to a change in corporate dividend payout

Cash Dividends

the most common type of dividend is a cash dividend. Commonly, public companies pay these 4 times per year.

clientele effect

the observable fact that stocks attract particular groups based on dividend yield and the resulting tax effects

trading range

the price range between the highest andlowest prices at which a stock is traded

stock repurchasing

the purchase, by a corporation, of its own shares of stock; also known as a buyback

homemade dividend policy

the tailored dividend policy created by individual investors who undo corporate dividend policy by reinvesting dividends or selling shares of stock

Putting it all together

1. Aggregate dividend and stock repurchases are massive, and they have increased steadily in nominal and real terms over the years. 2. Dividends are heavily concentrated among a relatively small number of large, mature firms 3. Managers are very reluctant to cut dividends, normally doing so only due to firm-specific problems 4. Managers smooth dividends, raising them slowly and incrementally as earnings grow 5. Stock prices react to unanticipated changes in dividends

3 different positions on dividends

1. based on homemade dividend argument, dividend policy is irrelevant 2. Because of tax effects for individual investors and new issue costs, a low-dividend policy is best 3. Because of the desire for current income and related factors, a high-dividend policy is best

Distribution

A payment made by a firm to its owners from sources other than current or accumulated retained earnings

Stock Dividend

A payment made by a firm to its owners in the form of stock, diluting the value of each share outstanding

Flotation Costs

In our example illustrating that dividend policy doesn't matter, we saw that the firm could sell some new stock if necessary to pay a dividend. As we mentioned in chapter 15, selling a stock can be quite expensive. If we include floatation costs in our argument, then we will find that the value of the stock decreases if we sell new stock.

Standard Method of Cash Dividend Payment

The decision to pay a dividend rests in the hands of the board of directors of the corporation. When a dividend is declared, it becomes a debt of the fir and cannot easily be rescinded.

True or False: Dividend policy is irrelevant

True At least only in the simple case we have been examining. Dividend policy itself cannot raise the dividend at one date while keeping it the same at all other dates. Rather, dividend policy merely establishes the trade-off between dividends at one date and dividends at another date

Taxes

U.S Tax laws are complex and they affect dividend policy in a number of ways. The key tax feature has to do with the taxation of dividend income and other capital gain. For individual shareholders, effective tax rates on dividend income are higher than the tax rates on capital gains

Dividend Restrictions

force firm to retain assets rather than paying them out to shareholders