Dividend is a term that most of people might have heard about even if those are not engaged with finance. For those who was or is studying or working in investment banking they might be exposed to many types of dividend payment forms. companies may have dividend reinvestment plans which takes all dividends that are supposed to be distributed to shareholders to reinvest for the continues business the company is undertaking. Doubtlessly, shareholders have the right rather than obligation to contemplate whether or not to reinvest their dividends into a new project that seems not as good as evaluated. most companies would offer bonus share plans also dividend reinvestment plans. The distinction between these two is that the later is treated as though they have received the case dividend and then reinvested it, so the investor is liable for tax on it. The good new, however, is that they can receive franking credit for the dividend, which means pay less tax than it is supposed to be.
The critical point here is that why'd companies continue paying dividends as usual? Even many of them would pay dividends by borrowing more debts, which can change the leverage or we would say the changing structure of capital. By paying dividends on the continuous basis investors would not be signalled any change for the company. Nonetheless, when investors are informed the dividend is not going to be paid for the next dividend payment date, share price definitely would go down as shares are sold out by investors.
A more stronger point of view from dividend signalling is that some investors know how managers behave and would interpret dividend changes as signal about future prospects.
Yet dividend signalling are believable but costly unfortunately, high payout policy would be costly to companies if CFs do not support it.
Next time we will further mentioning about dividend from other perspective. "Why dividend policy is irrelevant".
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