Dividend policy is a tool for changing financing mix

Dividend policy cannot be analyzed in a vacuum. Firms can use dividend policy as a tool to change their debt ratios, In chapter 9, we examined how firms that want to increase or decrease leverage can do so by changing their dividend policy: increasing dividends increases leverage over time, and decreasing dividends reduces leverage.

When dividends increase, stockholders sometimes get a bonus in the form of a wealth transfer from lenders to the firm. Lenders would rather have firms accumulate cash than pay it out as dividends. The payment of dividends takes cash out of the firm, and this cash could have been used to cover outstanding interest or principal payments. Not surprisingly, bond prices decline on the announcement of large increases in dividends. It is equity investors who gain from the loss in market value faced by bondholders. Bondholders, of course, try to protect themselves against this loss by restricting how much firms can pay out in dividends.

Returns: An Empirical Analysis, Journal of Finance, Vol 36, 1-12.

Retirement Planning For The Golden Years

Retirement Planning For The Golden Years

If mutual funds seem boring to you, there are other higher risk investment opportunities in the form of stocks. I seriously recommend studying the market carefully and completely before making the leap into stock trading but this can be quite the short-term quick profit rush that you are looking for if you am willing to risk your retirement investment for the sake of increasing your net worth. If you do choose to invest in the stock market please take the time to learn the proper procedures, the risks, and the process before diving in. If you have a financial planner and you definitely should then he or she may prove to be an exceptional resource when it comes to the practice of 'playing' the stock market.

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