Critique: dividends how important are they?

After reading Jessica M’s post on dividends I disagree with how beneficial they are, and with the current economic crisis companies should shy away toward declaring dividends. Wikipedia criticizes that money that goes toward dividends should be reinvested into the company instead. Also, the company will have more capital on hand when they need it to fund future projects, if needed.

Also dividend income could be subject to double taxation, where you could be possibly be taxed for more than what was declared in the dividend. So the investor could possibly see no gains from dividend income, due to taxes. Sometimes dividends are so small that, that it costs more for the company to send the check, than what the dividend was worth. The larger the dividend the bigger the cost for the company.

Callwriter argues that dividends in a bear market are good because stock prices won’t reach ridiculous values. I disagree with this because the company may not be able to afford to pay every time it thinks the price of its stock is too high. A company shouldn’t focus so much on its stock price. Instead is should it should focus on R&D and future investment opportunities.

Since paying dividends decreases a stocks value, a company loses value through the payment of dividends.

Callwriter states, not paying a reasonable dividend can actually result in harm to shareholders. Hoarding cash can lead to excessive executive compensation, poor management, and employing assets in unproductive ways. One study found that the more cash a company keeps, the more likely it will overpay for acquisitions. Dividend-paying companies tend to be more efficient in their use of capital than similar companies that do not pay dividends and are less likely to engage in funny accounting.



Links:
http://rmi4350jmorse.blogspot.com/

http://en.wikipedia.org/wiki/Dividend

http://www.callwriter.com/newsletter/dividend-basics.htm