8. Dividends Flashcards
Stocks with high dividend yield assumed to generate ______
positive alpha
reinvested dividends account for _____ of ending wealth of a passive buy and hold S&P500 investor from 1963-2013
79%
Growing companies _____ pay dividends, they_____
do not pay dividends, invest RE back into the company
6 Reasons Firms May Pay Dividends
- Company may not have good use for retained earnings
- investors like dividends
- clientele argument
- use of dividends as a tool to signal forecast of expected future earnings
- managers receiving options as part of compensation packages
- tax treatment policy is related to dividend payout policy
A company will prefer not to pay dividends if____
ROE > R
Why are mature firms more likely to pay dividends?
Less +PVGO projects
Why do investors like dividends?
Dividends is getting money back - do not trust their agents to turn current cash flows into future cash flows
What is the clientele argument?
Some real estate investment trusts can avoid taxes if they pay out at least 90% of earnings as dividends
Endowment funds cannot ____
make their own dividends (no capital gain by selling shares)
dividends need to be ____
consistent in both timing and amount
Managers receiving options as part of their compensation packages creates _____. Why?
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
Dividend Imputation Tax Credit (2)
- 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
Dividend imputation tax credit is equal to ____ which is ___
tax paid at company level, 28%
If you are in a higher tax bracket, you may_____
pay additional tax on your dividends
If you are in a lower tax bracket, you may ____
receive a tax benefit from your dividends
Tax law in US regarding dividends
double taxation - personal and company
Announcement date
date board of directors declare dividend to be paid, becomes a legal liability
Payment date
Date of electronic deposit of your dividend into brokerage account
Ex-dividend day
first day that the stock trades without the right to the dividend (will not receive dividend if you purchase on ex-dividend day)
Date of record
Date on which official holders of stock are acknowledged and rightfully entitled to the recently declared dividend
Dividend Timeline in NZ (now)
- Announcement Date
- Ex-date
- Date of Record
- payment date
Between 1992 to 31 Aug 2010 what was different about the date of record? Why did this change?
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
From March 2016, how did equity trades change in NZ?
They were now settled “T+2” business meaning that it would take 2 business days to settle any equity trades
If you purchase before the ex-dividend date, will you receive a dividend?
yes - always (before and after 2010)
The ex-date and date of record are always
one business day apart
Would you get a dividend if you purchased stock on the day of record in August 2010?
Yes as its before 2010
Would you get a dividend if you purchased stock on the day of record in May 2021?
No - after 2010
Corporations ____ any changes in dividend payouts with ____
Smooth, this years dividend amount and timing being an indicators of next year’s dividend amount and timing
Interim dividend
Usually accompanies the company’s interim financial statements
Stockholders and managers view a cut in dividends as
a signal that current dividends are not sustainable
In the absence of ____ and _____, dividend policy is irrelevant
taxes and market friction
Market friction
Anything that interferes with trade eg. t-costs, short sale restrictions, etc.
Dividends can convey ____
valuable information to investors
Investors really like _____ increasing stock prices by _____ and really dislike _____ decreasing stock prices by ____
dividend initiations, 10%, dividend omissions, 20%
4 Important Determinants of Dividend Policy
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
Changes in dividends are _____ related to changes in earnings in each of the _____
positive, subsequent two years
Proportion of firms paying dividends has declined from
66% in 1978 to 20% in 1999
Majority of firms not paying dividends are
small firms with low profitability and strong growth opportunities
Agency conflicts between shareholders and managers are at the ____
core of corporate payout policy
Less evidence that signalling plays a _____
significant role in dividend policy decisions or the decision to repurchase shares
