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Factors Favoring High Dividend Payouts Video

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  • 0:03 Dividends
  • 1:05 Individual Investors
  • 2:08 Institutional Investors
  • 3:20 Lesson Summary
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Lesson Transcript
Instructor: Natalie Boyd

Natalie is a teacher and holds an MA in English Education and is in progress on her PhD in psychology.

Many investors prefer a high cash dividend payout, but they might prefer it for different reasons. In this lesson, we'll examine what factors could lead individual and institutional investors to favor high cash dividend payouts.

Dividends

Jeannie runs a company that began selling shares of stock to investors last year. Now, the company is making a profit, and Jeannie (along with the board of directors) has decided to give shareholders a dividend, or a payment to stockholders from the profits of a company. Dividends can come in many forms: cash, more stock shares, or even a physical gift. But Jeannie's company, like most companies, has decided to give a cash dividend. That is, stockholders will receive a check based on how many shares they own.

But there's still one big decision to make: how much should the dividends be? The company has a pretty big profit, so they can either give a big cash dividend to their investors, or they can give a smaller cash dividend and reinvest the rest of the profit into the company. What should they do?

To understand why it might be beneficial for Jeannie's company to give a large dividend, let's look at the reasons that a high dividend payout is beneficial from two perspectives: that of institutional investors and that of individual investors.

Individual Investors

Jeannie's friend May is an individual investor. She's just one person, and she's bought shares of Jeannie's company as part of her savings. She'll be getting a dividend when Jeannie's company pays out, and she's hoping for a high dividend. To understand why May wants a high dividend, we first have to discuss why someone would ever want a low dividend. After all, more money's good, right?

Not so fast. Jeannie also holds stock in her company, and she's hoping for a low dividend payout. That's because Jeannie is a high-income earner and doesn't really need the cash right now. If she gets a high dividend payment, it means that the dividends will be taxed at a very high bracket because she makes so much. It's better for her if the company reinvests the money in the company and pays out very little.

But May isn't like Jeannie. She's retired and on a fixed income. Her tax bracket is very low, so May doesn't worry about the money being taxed too much. In addition, May really could use the money since she doesn't have a big income coming in. So, people like May, who are in a low tax bracket and need the money, prefer a high dividend payout.

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