Coca-Cola Dividend Policy
The definition of dividend is as follows: A dividend is the distribution or sharing of parts of profits to a company's shareholders. Now the question is why do companies pay dividends to it s shareholders? Because it’s the shareholders that are the real owners of the corporation and one would not own a piece of anything unless it would make money for them. So in turn a company wants to pay dividends to keep the shareholders happy and show that they are being profitable. There are two things a company can do when talking about dividend policy. One is tp have the firm distribute income as cash dividends or to have it either repurchase stock or else plow the earnings back into business. Both of which should in theory result in capital gains. So the companies optimal dividend policy must strike a balance between current dividends and future growth so as to maximize the stock price.
Some reasons a person might want to receive income in the form of a cash dividend would be that the cost of capital decreases as the dividend payout is increased because investors are less certain of receiving the capital gains that are supposed to result from retained earnings then they are of receiving dividend payments. In effect, investors value a dollar of expected dividends more highly then a dollar of expected capital gains. It is less risky then the total expected return equation. Some people prefer to have their money in their own possession so they can value it better. Rather then trying to value their dollar while it is still being used by the company to get hopefully larger.
A person may be against the high dividend policy of a company because dividends are could be taxed up to 38.6% and wealthy investors would not want that high of a tax on their returns. So since capital gains are taxed at 20% they would want the company to plow the earnings back into the business. Earnings growth would lead to stock price increases and thus...
Please join StudyMode to read the full document