Week 7: Dividend Policy

In this week 7, the topic that i have chosen is dividend policy. The dividend policy that i would be talking about this week is about Modigliani & Miller's famous dividend policy which is the dividend irrelevance. As according to Modigliani & Miller said that dividend irrelevant means that shareholder getting dividend doesn't mean anything, and shareholder not getting dividend doesn't also meant that the business is failing or the company's share is worthless. A company is more than just receiving dividend, it is also judge on if the company can create a effective investment policy which can result to an increase of Net Present Value (NPV), share price, and definitely shareholder wealth.

A case that once happen to my parents as an investor is that 6 years ago my dad decided to invest in a company that provide electronic products such as laptops, cooking machines, and television. The first 2 years was a mess as my dad would not receive any dividend or sometimes just a bit of dividend, he felt furious in wanting to sell the shares for money. Although my dad was part of the company, he was only a silent investor and therefore did not take part in any business decision or any daily operations that the business has. My mother decided to tell my dad on maybe the company have some plans in the future that can provide huge profit to the company, at first my dad didn't believe so but in the end he didn't see selling the share would bring any benefits as he claimed it to be an experiment on the shares, if the shares price fall then he would accept his fade but what if the share prices increases and the dividend increases a lot? 4 years later, the business share price increase as my dad would receive a dividend of triple of what he usually earned 4 years ago, as from now he felt lucky in deciding to keep the share to himself, as if he made up his mind to sell it back then for sure he would regret selling it till today. 

As also wanting to be a future investor, i learn from the Modigliani & Miller theory of dividend irrelevance that when investing or wanting to buy share of a certain company. The most important and powerful thing is to not look at the current dividend but to look at the future action plans of the company, as i would definitely be more interested in investing at a business that struggles now but will receive consistent dividend in the future rather than investing at a company that provides a short term dividend now but has a hard time of giving dividend in a long term time. In the end, i believe that everyone that is trying to invest in a company should believe in the Modigliani&Miller theory of dividend irrelevance, as this allows investors to actually look at the bigger picture and also look outside the box and look at the things that the company can do in the future.

Although small dividends lowers the interest for investors to invest in a certain company, a company should also prevent high dividend as this might result to the company not having enough capital to provide on the long term plan for the company. It is best to aim for a stable dividend with a stable growth in the company as this provides the company capital for future plans and at the same time increases shareholder wealth. 

In the end what do you guys think? if you are a investor what type of dividend would you rather have or receive?