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It is worth noting that dividends represent the money income of shareholders. They reflect the efficiency and success of a commercial organization. As the research shows, the majority of organizations consider reinvested earnings as the leading source of financing, and because the payment of dividends reduces its volumes, the decision on the way dividends are paid affects the size of the attracted sources of capital.
One of the most important tasks of the dividend policy is to ensure the optimal correlation of shareholders’ interests with sufficient financing aimed at the development of the company. The purpose of this paper is to review the studies conducted on the topic of dividend policy and to determine whether dividends are significant for companies or not.
Summary and Reflection
It is crucial that the self-financing of companies can directly depend on that part of the net profit, which organizations send to pay dividends. Consequently, this can lead to a reduction in the rate of growth of equity and solvency. However, if companies do not pay dividends to their shareholders, they, in turn, can start getting rid of securities, which will lead to a decline in the market value (Rahgozar & Rahgozar, 2014).
Thus, companies need to anticipate whether the number of dividends paid will affect the wealth of the shareholders and what maximum amount of payments can be furnished by the enterprise. Many experts in the industry emphasize that in the long run, dividend yield makes a big contribution to the overall profitability (Rahgozar & Rahgozar, 2014). The reviewed researches have shown that the package consisting of shares with high profitability will surpass the one with low profitability as well as market profitability for a long period. Nevertheless, Fu and Blazenko (2015) argue that this is not characteristic of the current market.
They have provided a hypothesis that “the returns for non-dividend paying firms are no greater than dividend-paying firms despite high-risk metrics” (Fu & Blazenko, 2015, p. 15). Notably, their assumption has been confirmed by the analysis of common-share returns, which evidenced no significant difference between the two polar alternatives despite the existence of certain risks in the case of non-dividend paying enterprises.
In the same manner, Denis and Osobov (2007) have conducted their study to determine the regular connection between dividend-paying and non-paying firms. Interestingly, the research results support the provisions promoted by the previous group of researchers. That is to say, the propensity to pay dividends depends on the domain of a life cycle (Denis & Osobov, 2007). Therefore, the inclination to make payments depends on the scale of business, the capabilities to expand or go international, and the earned equity mix. For this reason, it can be stated that their research supports the approach assuming that the preparedness to pay dividends depends primarily on the allocation of the free cash flow (Tsuji, 2012).
Thus, it is impossible to make an unambiguous conclusion about whether dividends do matter. On the one hand, some researchers and experts in the field confirm that the share price directly depends on the size of dividend payments. On the other hand, as analysis of the articles has revealed, investors can appreciate highly the value of the shares of the enterprise that does not make payments. The main factor that testifies that dividends are not important is that if investors are well informed about the development programs, directions of reinvestment, and other key factors, their valuation of shares will still be high.
Denis, D., & Osobov, I. (2007). Why do firms pay dividends? Evidence on the determinants of dividend policy. SSRN, 1-50.
Fu, Y., & Blazenko, G. (2015) Returns for dividend-paying and non-dividend paying firms. International Journal of Business and Finance Research, 9(2), 1-20.
Rahgozar, R., & Rahgozar, N. (2014). Returns of dividend vs. non-dividend-paying stocks and their relations with financial distress and market risk measures. The Journal of Finance Issues, 13(1), 35-42.
Tsuji, C. (2012). A discussion on the signaling hypothesis of dividend policy. The Open Business Journal, 5, 1-7.