Scribd Logo
Upload

Welcome to Scribd!

  • 25 views

    The Importance of Dividends

    Uploaded by

    smartravian007
    The document discusses several topics related to dividends and their taxation. It begins by explaining that dividends are important for investors to assess companies as investment prospects. It then discusses two studies that found taxes change the relationship between dividend yields and market returns, suggesting taxes are important determinants of market equilibrium. The next section notes dividends' correspondence with economic activity is loose and they typically lag behind aggregate changes. Finally, it discusses that dividend strategies have complex tax implications that must be considered to avoid reducing after-tax returns. Proper coordination between advisors is important to maximize benefits while managing tax costs.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    The Importance of Dividends

    Uploaded by

    smartravian007
    25 views4 pages
    The document discusses several topics related to dividends and their taxation. It begins by explaining that dividends are important for investors to assess companies as investment prospects. It then discusses two studies that found taxes change the relationship between dividend yields and market returns, suggesting taxes are important determinants of market equilibrium. The next section notes dividends' correspondence with economic activity is loose and they typically lag behind aggregate changes. Finally, it discusses that dividend strategies have complex tax implications that must be considered to avoid reducing after-tax returns. Proper coordination between advisors is important to maximize benefits while managing tax costs.

    Original Description:

    ausama

    Original Title

    ausama

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses several topics related to dividends and their taxation. It begins by explaining that dividends are important for investors to assess companies as investment prospects. It then discusses two studies that found taxes change the relationship between dividend yields and market returns, suggesting taxes are important determinants of market equilibrium. The next section notes dividends' correspondence with economic activity is loose and they typically lag behind aggregate changes. Finally, it discusses that dividend strategies have complex tax implications that must be considered to avoid reducing after-tax returns. Proper coordination between advisors is important to maximize benefits while managing tax costs.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    25 views4 pages

    The Importance of Dividends

    Uploaded by

    smartravian007
    The document discusses several topics related to dividends and their taxation. It begins by explaining that dividends are important for investors to assess companies as investment prospects. It then discusses two studies that found taxes change the relationship between dividend yields and market returns, suggesting taxes are important determinants of market equilibrium. The next section notes dividends' correspondence with economic activity is loose and they typically lag behind aggregate changes. Finally, it discusses that dividend strategies have complex tax implications that must be considered to avoid reducing after-tax returns. Proper coordination between advisors is important to maximize benefits while managing tax costs.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    The importance of dividends

    Dividends are important for more than income generation: they also provide a way for
    investors to assess a company as an investment prospect. Many companies with
    excess capital for their own investment requirements have returned capital to
    shareholders through either a share buyback or a special dividend. In a share buyback,
    a company will buy its own shares on the stock exchange. These can either be held as
    treasury stock (in reserve for acquisitions or share incentive scheme payments) or
    cancelled. If shares are cancelled, the total number of issued shares reduces. Thats
    positive for the value of the remaining shares, as the companys value and the total
    earnings base are now spread over a smaller number of shares.

    Impacts of Financial Leverage


    Taking on debt, as an individual or a company, will always bring about a heightened
    level of risk due to the fact that income must be used to pay back the debt even if
    earnings or cash flows go down. From a company's perspective, the use of financial
    leverage can positively - or sometimes negatively - impact its return on equity as a
    consequence of the increased level of risk. Return on equity is the rate of return on the
    shareholders' equity of a company's common stock owners. It measures a firm's
    efficiency at generating profits from every unit of shareholders' equity. Return on equity
    shows how well a company uses investment funds to generate earnings growth. At an
    ideal level of financial leverage, a company's return on equity increases because the
    use of leverage increases stock volatility, increasing its level of risk which in turn
    increases returns. However, if a company is financially over-leveraged a decrease in
    return on equity could occur. Financial over-leveraging means incurring a huge debt by
    borrowing funds at a lower rate of interest and using the excess funds in high risk
    investments. If the risk of the investment outweighs the expected return, the value of a
    company's equity could decrease as stockholders believe it to be too risky.

    The Debt-Equity Ratio, the Dividend


    Payout Ratio
    One of the most important problems facing a financial manager is that of choosing from
    all the available investment projects that set whose acquisition will enhance the value of
    the firm. That is, he must select that set of proposals whose elements have income
    streams with a capitalized value greater than their cost. Conversely, his problem is to
    choose those projects whose cash flows, when discounted at that capitalization rate,
    have a positive present value. This problem can be separated into two parts - the
    determination of the cash flow associated with each project and the discount or
    capitalization rate to be used in computing the present value of these cash flows.
    The major concern of this thesis is not with the former but with the latter. Its purpose is
    to identify the factors determining the capitalization rate and, more specifically, to
    separate these factors into those associated with the physical assets in which the firm
    invests and the income streams they generate, and those having their origin in the
    method used to finance those assets.

    Chapter title: Taxes Affect the Valuation of Dividends


    Author: James M. Poterba
    Published : February 1989
    since there have been two radical changes and several minor reforms in British dividend
    tax policy during the last twenty-five years. Studying the relationship between dividends
    and stock price moveinents during different tax regimes offers an ideal controlled
    experiment for assessing the effects of taxes on investors' valuation of dividends. Using
    daily data on a small sample of firms, and monthly data on a much broader sample, we
    find clear evidence that taxes change equilibrium relationships between dividend yields
    and market returns. These findings suggest that taxes are important determinants
    of security market equilibrium, and deepen the puzzle of why firms pay dividends.
    Chapter Title: Dividends Under the Income Tax
    Chapter Author: Daniel M. Holland
    Publication Date: 1962
    The Importance of Dividends in Personal and Taxable Income There is a
    correspondence between the level of economic activity and aggregate
    Dividend receipts with both measured on an annual basis, but it is loose. Annual
    Dividend receipts did not decline in any of the milder business cycle contractions
    Since 1920, namely, 19231924, 19261927, 19451946, 19531954. A closer
    examination based on monthly data discloses that dividends typically lag behind
    aggregate economic activity. See Daniel Creamer, Personal Income During Business
    Cycles, Princeton University Press for the National Bureau of Economic Research,
    1956.
    Chapter title: D I V I D E N D S I M P A C T O N T A X A B L E I N V E S T O R S
    Chapter author: Graham, Benjamin and Dodd, David
    Publication Date: 2010
    Although one may think that dividend strategies are straight forward and intuitive, they
    are actually quite complex and have nuances that must be considered. Dividends
    impact on taxable investors creates opportunities for both tax savings and profit. Some
    of the examples discussed herein show that the potential costs of poor tax planning can
    range from a 0.25% to 1.00% reduction in after-tax performance. Consequently, both
    individuals and institutional entities should consider the tax rates and rules when
    developing an investment strategy. The tax impact should be a major consideration for
    taxable investors but not the sole deciding factor. Financial advisors, consultants and
    tax advisors need to work closely together to make sure that the potential benefits of
    any investment strategy are not completely negated by increased tax costs.

    Title: IMPACT OF DIVIDEND POLICY ON SHAREHOLDERS VALUE

    Author: Sujata Kapoor


    Publication Date: july 2006
    FMCG companies score high on dividend stability and consistency as Lagged
    dividend and PAT are important factors governing dividend distribution. The
    quality of cash flows, which is measure of liquidity of the firm and firm size are
    found be inconsequential in determining the dividend payout. The opportunities for
    future growth and expansion are found to be negatively related to dividend payout
    ratio. Larger is the growth and investment opportunities available to the firm,
    lesser is the incentive to pay dividends by retaining larger proportion of profits.
    The regression results also disclose negative and significant relationship with
    Retained earnings and Capital Expenditure during the current year which is in
    conformity with the existing literature.

    REFERENCES:
    http://dspace.mit.edu/bitstream/handle/1721.1/47278/debtequityratiod00whit.pdf

    http://www.researchgate.net/publication/228628482_Impact_of_financial_leverage_on_dividend_
    policy_Empirical_evidence_from_Karachi_Stock_Exchange-listed_companies

    https://www.boundless.com/finance/capital-structure/thinking-about-financial-leverage/impactsof-financial-leverage/

    https://securities.standardbank.co.za/ost/nsp/FrontOfficePublic/Legacy/help/guide_display.asp?str
    Action=Open&strFileName=fw-SB-4.pdf&strFolderName=Unit1-12

    www.nber.org/chapters/c1948.pdf

    www.northerntrust.com/documents/white-papers/.../dividends-impact.pdf

    www.emlab.berkeley.edu/~auerbach/divtax.pdf

    You might also like