Discussion: Corporations
A cash dividend is a compensation made by a company out of its income to shareholders in the form of money. Profitable worth shifted to investors from the company instead of the company reusing the cash. While a stock dividend is an addition of share quantity in a company with the additional shares given to investors. As a stock holder in a company, I would prefer stock dividend to cash dividend, because stock dividend has the advantage of being tax free as compared to cash dividend which is taxable, its value deteriorates once issued to cover payout ratio. The other advantage of a stock dividend is that it gives the investor an option of reinvesting the stock in the company with the expectation of a rise in share value. The share holder could sell the shares to earn cash which could be used to generate shareholder’s new cash dividend, While cash dividends once issued the fall in its worth, falls slightly to cover the economic worth of the share. Stock dividend preferred for its advantage of choice not present in a cash dividend. Example of a stock dividend is the preferred stock while the example of a cash dividend is the common stock.
External factor
Dividends paid to shareholders affected by various factors before distribution to shareholders. For instance when there is an economic crisis and unfavorable business circumstances, the management may opt to keep a large portion of earnings for future distress. In times of depression management may also opt to keep earnings to safeguard the company’s liquidity situation. While in times of success the management generously distributes the earnings to shareholders. In times of inflations management retains much of the earnings. Legal policy that requires a company to pay dividends at a certain time may force the management to pay out the dividends earnings despite the circumstances that the management may be facing. Favorable market conditions increases the share price of a stock forcing the management to offer dividends earnings to investors, a company may be involved in contractual limits where lenders need the company to maintain a certain liquidity ratio for lenders to offer them more loans.
Internal factors
The shareholders may also demand their earnings when market share of a dividend rises, or when they anticipate a fall in share price below the normal standard the share holders may request for dividend earnings. Nevertheless when the company is experiencing some financial needs they may wish to retain a large percentage of the shares. Management may decide to keep the dividend earnings to retain the liquidity position of the company since payment of dividends leads to cash outflow of the company which may interfere with the company’s operations, if the company is not performing well in the market. Shareholders may also seek for dividends to prove the company power in the market, if they do not demand the managers may be reluctant in ensuring the company’s operations, and activities yield recommended earnings. The management may also be reluctant in distribution of dividend earnings to retain management power since the distribution of dividend earnings reduces management power.
The factors ranked according to the external and internal factors that influence the distribution of dividends by managers. The external factors affect the distribution of dividend earnings than the internal factors, reason for listing the external factors first before the internal factors.
