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I'm not even close to being an amateur economist, but: 1. Paying dividends makes you an attractive investment to people looking for long-term investments, such

I'm not even close to being an amateur economist, but: 1. Paying dividends makes you an attractive investment to people looking for long-term investments, such as pension funds. 2. This increases stock price, and when a corporation holds much of the stock, this increases the corporations holdings. 3. Those individuals working within the corporate structure that hold stock, increase their net worth. 4. The corporation and influential employees gain, and so keep paying out high dividends. Please correct me if I'm wrong, as I'm just guessing.

dodobirdlord 7y ago
Basically completely wrong, so here's some correction. > 1. Paying dividends makes you an attractive investment to people looking for long-term investments, such as pension funds. Close, but paying dividends makes you an attractive investment to anyone. Stock in a company is valuable because the company pays dividends, is expected to eventually pay dividends, or is expected to be bought out by another company. > 2. This increases stock price, and when a corporation holds much of the stock, this increases the corporations holdings. This mostly should not change the stock price. If the market believes that the company is foolish to pay the dividend because it is able to get a higher rate of return than its shareholders will be able to get with the money, then announcing a dividend would reduce the share price. If the market agrees with the company's management that the company does not have better investment opportunities than the shareholders, then the share price will go up if the dividend was unexpected (i.e. the market thought that the management was stupid, but it turns out they are not), and otherwise will not change. > 3. Those individuals working within the corporate structure that hold stock, increase their net worth. As previous, not really. Under normal circumstances paying a dividend will have, if anything, a negative effect on the share price. (The company has less money now, why would it be more valuable?) > 4. The corporation and influential employees gain, and so keep paying out high dividends. Sorta correct! Once you begin paying a dividend, cutting the dividend should indicate one of two things. Possibility one, you have found new investment opportunities to better deploy the money than the shareholders could. Great news! Possibility two, the company is struggling financially and no longer accrues profit that it can use to pay the dividend. Bad news! If the market doesn't believe that the company has good investment opportunities, then cutting a dividend should be taken as a sign that the company is struggling, and the stock price would fall (If the company can't afford to pay dividends, why own the stock?). So if influential employees hold a lot of stock, they will be inclined to continue paying the dividend.
- MarcScott 7y ago
  Thank you for taking the time to reply, and correcting my misconceptions.

dodobirdlord 7y ago

Basically completely wrong, so here's some correction. > 1. Paying dividends makes you an attractive investment to people looking for long-term investments, such as pension funds. Close, but paying dividends makes you an attractive investment to anyone. Stock in a company is valuable because the company pays dividends, is expected to eventually pay dividends, or is expected to be bought out by another company. > 2. This increases stock price, and when a corporation holds much of the stock, this increases the corporations holdings. This mostly should not change the stock price. If the market believes that the company is foolish to pay the dividend because it is able to get a higher rate of return than its shareholders will be able to get with the money, then announcing a dividend would reduce the share price. If the market agrees with the company's management that the company does not have better investment opportunities than the shareholders, then the share price will go up if the dividend was unexpected (i.e. the market thought that the management was stupid, but it turns out they are not), and otherwise will not change. > 3. Those individuals working within the corporate structure that hold stock, increase their net worth. As previous, not really. Under normal circumstances paying a dividend will have, if anything, a negative effect on the share price. (The company has less money now, why would it be more valuable?) > 4. The corporation and influential employees gain, and so keep paying out high dividends. Sorta correct! Once you begin paying a dividend, cutting the dividend should indicate one of two things. Possibility one, you have found new investment opportunities to better deploy the money than the shareholders could. Great news! Possibility two, the company is struggling financially and no longer accrues profit that it can use to pay the dividend. Bad news! If the market doesn't believe that the company has good investment opportunities, then cutting a dividend should be taken as a sign that the company is struggling, and the stock price would fall (If the company can't afford to pay dividends, why own the stock?). So if influential employees hold a lot of stock, they will be inclined to continue paying the dividend.

MarcScott 7y ago
Thank you for taking the time to reply, and correcting my misconceptions.