Investment is one of the options that can be chosen to prepare emergency funds in addition to saving. Investment is a form of passive income. The form of investment that is often used and known by the public is stock investment. By investing in shares in a company, a person is also entitled to dividends given by the company. Dividend distribution by the company is one of the things that is considered by an investor, a person who invests in a company, when he wants to buy shares in a particular company. So what is a dividend and how it works will be described in this article to enrich our common knowledge.
Dividends are a form distributed by a company for the profits earned in the company's activities to investors in accordance with the number of shares owned. Dividends can be distributed by the company to investors in the form of cash or additional shares. Dividends distributed in the form of additional shares in lieu of cash dividends can make the company able to increase retained earnings which inadvertently results in excess liquidity and creates a conflict of interest between shareholders and managers. Â
There are several theories used to understand this dividend policy.
1. Dividend Irrelevance Theory
This theory states that dividend policy has no influence on the value of the company or its cost of capital. Firm value in this theory is measured by indicators of how the company is able to generate profits and business risks.
2. Bird in the Hand Theory
This theory illustrates that an investor values dividend income more than the expected income from capital gains generated from the company's retained earnings.
3. Tax Preference Theory
This theory illustrates that investors prefer a low dividend distribution to a high dividend distribution because they can avoid capital gains tax if the shares owned by a person until he dies have no capital gains payable.
4. Signaling Hypothesis
This theory illustrates that an increase in dividends above the normal increase indicates that the company can generate good profits in the future while a decrease in dividends below the normal decrease is believed by investors that the company will experience difficult times in the future.
5. Clientelle Effect
This theory states that investors have different preferences regarding the company's dividend policy. There are investors who prefer to take high dividends quickly and there are investors who prefer if the company retains some of the company's net profit first before finally distributing it with higher profits.
Dividends are usually paid every semester or every year according to the company's decision. The higher the dividend payout ratio will be profitable for investors, but not for the company because it will weaken the company's finances, but conversely the lower the dividend payout ratio will strengthen the company's finances and will harm investors, because the dividends expected by investors are not as expected. The amount of dividends distributed is not always fixed or depends on the profits earned by a company. There are several procedures in dividend payments, such as the announcement date, cum-dividend date, shareholder record date, dividend separation date, and payment date. Dividends are not paid to all shareholders but to shareholders who have been registered before the dividend release date is determined. Therefore, investors who only buy shares in the days after the dividend announcement is issued will not get a share of the dividend even though they have bought shares of the company.
Thus some information related to dividends that we can observe and learn together.
This article was written to fulfill the financial management assignment given by Darmawan.
