Dividends are money reward that is supposed to be paid annually by a company to its shareholders. With regard to the company’s benefits and sharing profit related to dividends payment it is important to clarify if cash dividends are good or bad for business?
If any practice does not have positive result, it is not applied. By paying dividends to its shareholders, the company gains a particular benefit, while it automatically increases the company value and excites interests of new investors to the business. Moreover, news about dividends payment is a kind of signal for financial market. Obligation of regular dividends payment taken by a company reveals that the company possesses a constant cash flow and can ensure that such cash flow would not change during next years.
However, dividend payments have a negative side. Shareholders have to pay an interest rate in spite of the fact that the company delivering dividends also has to pay taxation. Double taxation is beneficial for the state but not for shareholders and business. By paying interest rate shareholders get less profit. Thus, they tend to decrease the cost of shares they possess. The only way to increase the total capital of a company is to keep money meant for dividends payment or to buy new shares.
To sum it up, I would like to emphasize that in spite of pros and cons of dividends payment which can be observed in different companies, from the point of view of Senior Executive of any business, dividends are of no importance. This opinion can be easily proved by Modigliani-Miller theorem. The theorem states that shares of companies that pay higher dividends become of lower cost and total shareholder return remains the same. Moreover, for any business assets it owns and incomes it receives remain also the same and do not depend on the dividend rate. Thus, for the Senior Executive, who takes care of business prosperity, the reinvestment of surplus into assets is more important than dividends payment.