Is A High Or Low Dividend Yield Better ?
Dividend refers to a part of a company’s profits that is distributed among the shareholders. The amount of dividend paid to the shareholders is a strong indicator of the financial status of a company. A company that manages to make available a large part of its profits for distribution as dividends can certainly be considered economically sound. Thus, dividend yield plays a major role in maintaining the company’s goodwill in the entire investor community. |
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However, the dividend amount to be paid to shareholders in every financial year depends largely on the company’s dividend policy. This policy ascertains the sharing out of total earnings between the Retained Earnings and the Payments to Shareholders accounts. The proportion of a company’s earnings that must be retained for utilization in growth and expansion and the proportion that should be given out as dividend are important decisions that depend on the internal dividend policy of the organization. Therefore, the answer to the question, whether high dividend yield is better than low dividend yield, is not definite and depends on the company’s current financial status, its long-term goals, and its policies.
In case the organization is not having any expansion plans for future, retaining a significant amount of earnings in the reserves makes no sense. In such a case, high dividend yield on company’s stocks can be expected. However, if the company plans to expand in future, a lot of earnings are retained and the dividend yield is kept to the minimum. Thus, low dividend yield does not necessarily refer to a financial crunch in the company.
Low dividend is better than a high yield; in the former case, the company can save a lot of money from the internally generated revenue and need not resort to loans and other liabilities for expanding in future. This is not possible in the latter case. However, for shareholders who require immediate returns on their investments, a high yield is anytime better than a low one. People who prefer low dividend yields are usually those who focus more on capital appreciation than on the basic dividend income.
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