Misunderstood Dividends

As we have stressed in the textbook, an investor should be indifferent between dividends and capital gains. And, in a world with higher taxes on dividends than on capital gains, investors should prefer capital gains. A recent WSJ article discusses the fact that many investors prefer dividends. In fact, the British Investment Association, which represents investment managers in the UK, argued that companies should not reduce dividends. It is surprising that professional investment managers would have such a strong view on high dividends. The preference for high dividends also appears to affect corporate finance as well. One survey mentioned in the article finds that about two-thirds of CFOs admit they would forego profitable projects if undertaking these projects would result in a dividend cut.