Cash Dividends Cliché


In response to The Daily Post’s writing prompt: “Cliché.”

Clichés become clichés for a reason. Tell us about the last time a bird in the hand was worth two in the bush for you.

“Oh! That fallacy again,” I exclaimed the moment I first directed my sight to the phrase  bird in the hand was worth two in the bushSpeaking with honesty, I cannot remember any worthy-to-be-shared instance when I stepped back for safety instead of stepping forward for growth. Having a background in Finance, let me interpret the prompt using Myron Gordon and John Lintner’s theory. They argued that the required return on equity declines as the dividend payout is increased for the reason that the certainty of receiving the capital gains that should result from retaining earnings is less than that of receiving dividend payments, apparently from the vantage point of investors. Thus, suggesting that a firm’s value will be maximized by setting the dividend payout ratio at a high level. This dividend argument was referred to as the bird-in-the-hand fallacy by Merton Miller and Franco Modigliani because in MM’s view, most investors have established dividend reinvestment plans that helped the investors automatically reinvest their dividends. In any event, the riskiness of the firm’s cash flows to investors in the long run is determined by the riskiness of operating cash flows (not by the dividend payout policy) in assumption that there are no taxes or transaction costs.

Personally, if I were an investor, I would think of the long-term so I prefer capital gains. The  cliché:  bird in the hand was worth two in the bush won’t work for me. As previously told,  “Clichés become clichés for a reason.” In this context, it has become such because some investors prefer dividends and maybe they repetitively speak about it. Perhaps…perhaps…perhaps…

 

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