Dividends are a monetary payout a firm may pay for each share an individual holds (Berk, 2017, p. 599). Firms may pay dividends if they are attempting to make their stock more appealing. Many mature investors choose to buy stock that pays dividends and us this as income while remaining in the market. These companies are considered blue bloods and historically only performed two percent off of small cap index (Waggoner, 2015). Many companies that choose this route are established and do not need the capital to continue to reinvest in itself. A company may choose to buy back stock if it’s considered undervalued. This is also a good defensive tactic in avoiding a hostile takeover where one organization buys enough stock to replace its board members by voting them out (Berk, 2017, p. 13).
A company would stop paying dividends or even reduce the amount to reinvest in itself. This means the company has identified a possible investment opportunity. It could mean the company is shoring up what they see as a weakness. That could mean paying down debt, updating equipment or saving capital in the event of an economic downturn. The result in lower or eliminated dividends would be a sell off for the investors wanting and holding a stock due to its dividend. The selloff would reduce the stock’s price initially but may be an opportunity for a growth investor, although the investor needs to learn if the money is being invested wisely (Waggoner, 2017). The growth investor may see that the company is preparing for an investment and take advantage of the low price of the stock.
Berk, J. Corporate Finance. [Chegg]. Retrieved from https://ereader.chegg.com/#/books/9780134202778/
Waggoner, J. (2015). Invest Like Your Grandparents. Money, 44(11), 53. Retrieved from http://search.ebscohost.com.saintleo.idm.oclc.org/login.aspx?direct=true&db=a9h&AN=111089931&site=ehost-live
Waggoner, J. (2017). When Dividends Don’t Pay. Money, 46(7), 34. Retrieved from http://search.ebscohost.com.saintleo.idm.oclc.org/login.aspx?direct=true&db=a9h&AN=123953582&site=ehost-live
