Investors will invest in the equity of a firm so as to earn a return on that investment. Investors...

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Investors will invest in the equity of a firm so as to earn a return on that investment. Investors aim to maximise their return on investment. In order to maximise this return on their sharholders' investment, companies should pay 100% of their earnings as dividends.
Do you agree? Discuss
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David · Accepted Answer

100% Dividend payout                                                                                                                                            1 

100% Dividend payout 
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100% Dividend payout                                                                                                                                            2 
 
100% Dividend payout 
Dividends from the stock are very crucial, it provides with the cash amount to the 
investors without making them sell the stock. It acts like a source of income for the investors. 
But with time paltry amount paid to the investors can be grown into enormous amounts, had 
there been no dividends payout. It is the power of compounding that comes into play. 
Whenever a person receives a dividend, in most of the cases the amount is very small, of 
the order of thousand dollars at max. Any investor receiving the amount will just use the amount 
for the daily purpose. If the same amount can be reinvested in the business itself and there is no 
100% dividend payout from the business, the growth can be enormous. Considering a live 
example: 
IBM vs. Exxon Mobile: From 1950 till 2003,  the growth rate of dividends for IBM was 
9.19% while for Standard oil of New Jersey (Exxon Mobile) paid just 7.11% dividends. Revenue 
growth rate for both the companies were 12.19% for IBM and just 8% for Exxon Mobile. 
Earnings per share grew at the rate of 10.94% for IBM while Exxon Mobile had the growth of 
7.47% only. It can be easily seen that IBM was doing better in terms of the numbers. In this 
period, growth rate in the sector for IBM was 14.65% and for Exxon Mobile it was negative 
14.22%. Here comes the turnaround.

Investors will invest in the equity of a firm so as to earn a return on that investment. Investors aim to maximise their return on investment. In order to maximise this return on their sharholders'...

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