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9.3.3 Conclusion

The discussion of different models is indicative of the fact that investors do prefer current dividends to retained earnings. The reason for this is obvious that the present dividends are certain. Investors assign higher value to certain stream of dividends. A financial manager should also recognize the existence of different types of investors. A low payout and consequently higher retention with higher growth will attract and satisfy the risk oriented investors while the high payout and consequently low retention and low growth rate will attract and satisfy the risk averse and conservative investors.

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Therefore, neither 100% payout nor 0% payout will bring the maximum market price. The optimum point lies somewhere in between. Too much payment in spite of reinvestment opportunities causes the investor to penalize the share price while too little payout also causes the investors to penalise the share price. Still the dividend payout ratio should be lower among the firms having good growth opportunities than the dividend payout ratio among those firms which have less opportunities of growth.

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