8. Dividends

Question 1

Stocks with high dividend yield assumed to generate ______

Answer 1

positive alpha

Question 2

reinvested dividends account for _____ of ending wealth of a passive buy and hold S&P500 investor from 1963-2013

Answer 2

79%

Question 3

Growing companies _____ pay dividends, they_____

Answer 3

do not pay dividends, invest RE back into the company

Question 4

6 Reasons Firms May Pay Dividends

Answer 4

1. Company may not have good use for retained earnings
2. investors like dividends
3. clientele argument
4. use of dividends as a tool to signal forecast of expected future earnings
5. managers receiving options as part of compensation packages
6. tax treatment policy is related to dividend payout policy

Question 5

A company will prefer not to pay dividends if____

Answer 5

ROE > R

Question 6

Why are mature firms more likely to pay dividends?

Answer 6

Less +PVGO projects

Question 7

Why do investors like dividends?

Answer 7

Dividends is getting money back - do not trust their agents to turn current cash flows into future cash flows

Question 8

What is the clientele argument?

Answer 8

Some real estate investment trusts can avoid taxes if they pay out at least 90% of earnings as dividends

Question 9

Endowment funds cannot ____

Answer 9

make their own dividends (no capital gain by selling shares)

Question 10

dividends need to be ____

Answer 10

consistent in both timing and amount

Question 11

Managers receiving options as part of their compensation packages creates _____. Why?

Answer 11

Agency conflicts as managers may invest in projects that are more risky due to benefits of volatility for their options. While investors do not want volatility, would prefer dividend payments

Question 12

Dividend Imputation Tax Credit (2)

Answer 12

• Avoid double taxation in New Zealand and Aus
• must declare the pre-tax gross dividend as part of your taxable income. Receive a tax credit to offset the tax due

Question 13

Dividend imputation tax credit is equal to ____ which is ___

Answer 13

tax paid at company level, 28%

Question 14

If you are in a higher tax bracket, you may_____

Answer 14

pay additional tax on your dividends

Question 15

If you are in a lower tax bracket, you may ____

Answer 15

receive a tax benefit from your dividends

Question 16

Tax law in US regarding dividends

Answer 16

double taxation - personal and company

Question 17

Announcement date

Answer 17

date board of directors declare dividend to be paid, becomes a legal liability

Question 18

Payment date

Answer 18

Date of electronic deposit of your dividend into brokerage account

Question 19

Ex-dividend day

Answer 19

first day that the stock trades without the right to the dividend (will not receive dividend if you purchase on ex-dividend day)

Question 20

Date of record

Answer 20

Date on which official holders of stock are acknowledged and rightfully entitled to the recently declared dividend

Question 21

Dividend Timeline in NZ (now)

Answer 21

1. Announcement Date
2. Ex-date
3. Date of Record
4. payment date

Question 22

Between 1992 to 31 Aug 2010 what was different about the date of record? Why did this change?

Answer 22

it was 1 business day prior to the ex-date (announcement, record, ex date, payment) - changed in Sept 2010 to align with US stock market

Question 23

From March 2016, how did equity trades change in NZ?

Answer 23

They were now settled “T+2” business meaning that it would take 2 business days to settle any equity trades

Question 24

If you purchase before the ex-dividend date, will you receive a dividend?

Answer 24

yes - always (before and after 2010)

Question 25

The ex-date and date of record are always

Answer 25

one business day apart

Question 26

Would you get a dividend if you purchased stock on the day of record in August 2010?

Answer 26

Yes as its before 2010

Question 27

Would you get a dividend if you purchased stock on the day of record in May 2021?

Answer 27

No - after 2010

Question 28

Corporations ____ any changes in dividend payouts with ____

Answer 28

Smooth, this years dividend amount and timing being an indicators of next year’s dividend amount and timing

Question 29

Interim dividend

Answer 29

Usually accompanies the company’s interim financial statements

Question 30

Stockholders and managers view a cut in dividends as

Answer 30

a signal that current dividends are not sustainable

Question 31

In the absence of ____ and _____, dividend policy is irrelevant

Answer 31

taxes and market friction

Question 32

Market friction

Answer 32

Anything that interferes with trade eg. t-costs, short sale restrictions, etc.

Question 33

Dividends can convey ____

Answer 33

valuable information to investors

Question 34

Investors really like _____ increasing stock prices by _____ and really dislike _____ decreasing stock prices by ____

Answer 34

dividend initiations, 10%, dividend omissions, 20%

Question 35

4 Important Determinants of Dividend Policy

Answer 35

Level of current and future earnings
continuity of past dividends
concerns about maintaining/increasing stock prices
concerns that dividend change may provide false signal to investors

Question 36

Changes in dividends are _____ related to changes in earnings in each of the _____

Answer 36

positive, subsequent two years

Question 37

Proportion of firms paying dividends has declined from

Answer 37

66% in 1978 to 20% in 1999

Question 38

Majority of firms not paying dividends are

Answer 38

small firms with low profitability and strong growth opportunities

Question 39

Agency conflicts between shareholders and managers are at the ____

Answer 39

core of corporate payout policy

Question 40

Less evidence that signalling plays a _____

Answer 40

significant role in dividend policy decisions or the decision to repurchase shares