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Consider the Dividend Irrelevance Theory and explain the following: Generally speaking, why is there an inverse...

Consider the Dividend Irrelevance Theory and explain the following: Generally speaking, why is there an inverse relationship between dividends and the potential for growth?

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Answer #1

Dividends issued by the company says a lot about the company plans on expansion. Dividends are the way to distribute the profits of the company. If a company has plans to expand in the future and require the profits to be invested back into business then it might offer less dividend. If a company distributes more dividends then it can mean that the company plans in future expansion may be less and the company thinks that shareholders can better utilize the funds somewhere else and get more return on investment.

Hence there is an inverse relation between dividends and the potential growth of the company because a high growth company will require funds to grow and it will not distribute profits to the shareholders.

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