Question

Explain why companies do not simply pay out dividends as a portion of their profits. What do most companies do in terms of dividend policy?

Answer 1

There are few reasons that company do not simply pay out dividends as a portion of their profits which are as follows:-

i. A growing company will not pay dividends as a portion of their profits because it will invest further in the growth of the company.

ii. Since it is beneficial to investor's from tax point of view, the company do not pay dividends as a portion of their profits.

iii. To avoid the risk of need of money raise, the company choose to not pay of dividends as a portion of their profits.

In terms of dividend policy, company decides how much cash to pay to the owners in the form of dividends instead of share repurchases, reduction in debt as it has huge effect on the total return.