Investing in stocks, is dividend payout a factor that you would consider before investing?

Paying dividend can fulfill a company’s objective in achieving maximization of shareholder’s value.  In shareholder’s perception, it is definitely a positive thing that a company pays dividends.  This leads to an increase of shareholder wealth. A company has the right to pay dividends or not due to its forthcoming new project. A company will choose not to pay dividend it needs to finance a new project.  However, paying dividend can be seen as the company is active. Are shareholders actually okay with the company not paying dividend?

Again, in the context of Modigliani and Miller (1961), they argued that dividend is irrelevant in terms of corporate earnings and also concluded that share valuation is independent of the amount of dividend paid by a company. In order to understand Modigliani and Miller’s theory, we have to assume that there are no transaction costs, firms can issue shares without incurring floatation, no tax paid and capital markets are perfectly efficient.  Because of these assumptions, investors who are rational pointed out by M&M, prioritize maximization of market value by adopting an optimal investment policy.

Looking at the some of the biggest companies in the world, i.e. Google Inc. and Amazon.com, they stopped paying dividend for years because these companies are aggressively investing in future growth initiatives in their bid to conquer the technology landscape. But why do shareholders of these companies still buy their shares even if they do not pay dividends? In my opinion, many companies, especially companies that are still growing, will choose to reinvest their capital gains for further developments and researches.  It is cheaper to reinvest their stock because it can generate higher capital gain.

However, there is also dividend relevance that was proposed by Lintner (1956) and Gordon (1959) which is also known as the Bird in the hand argument.  It was argued that dividend is preferred to capital gains due to their certainty as some investors would prefer to be certain of receiving dividend rather than not receiving dividend at all.  In this theory, dividends are seen as a signal to investors whether the company is progressing positively or not.  For example, if a company pays low dividend, investors might think that the company is not giving any good news to them, hence, selling off their shares.  And if a company pays high dividend, it means that the company is doing greatly in their businesses and activities – giving positive results/good news to investors.

Both dividend policies have been quite a controversial topic to many because, in my opinion, it is mostly based on investor’s point of view.  At the end of day, it is up to the investor whether or not they want to continue investing their money into stocks that will pay dividend or stocks that are uncertain of their dividend payment.  It is all based on investors’ attitude and considerations towards the stock that they want to invest. 

If you are an investor and you have invested in some stocks, would you rather be paid with dividend or wait for the company to issue dividend? 

Let me know in the comments below what your answers are and why? :)!