Blog 4

Dividends, something that I see myself receiving in the future when I invest in the shares market. I have always looked at dividends as some forms of passive income and that with good investing decisions in the share market, I will essentially have my money working for me to generate even more money. After this week’s lecture, I learned more about what are some of the dividends policy and the reality of how dividends actually work.

Every company that is funded by shareholders have to ask themselves 2 questions; do we reinvest the money into the company in hopes for better returns or do we pay out dividends to our shareholders in hopes of attracting more people to buy our shares? Ultimately, a company’s goal is to increase profits and to maximize shareholder’s wealth. This week’s lectures have opened my mind up to the 2 argument of dividend policies which are the Dividend Irrelevance School and the Dividend Relevance School. Based on what I have understood, the Dividend Irrelevance School states that dividends are merely residual payment that are paid only if there is a surplus after investing all the earnings. This would have the same results according to Modigliani and Millar as investment and dividends payout both increase shareholder’s wealth. The Dividend Relevance School however, states that because the future is uncertain, investors would prefer to have the dividends paid out now than to leave it in the uncertainty of investments.

Having learned this and thinking about some of the shares that my parents have bought back home, I think that dividends truly matter to companies and are definitely relevant. This is because companies generally do not want to lose investors’ confidence by paying out low dividends but at the same time paying overly high dividends may be unsustainable in the long run so they need to find the right balance.