List and describe three reasons for a low-dividend-payout policy

What will be an ideal response?

Answer: First, lower dividends avoid or postpone the payment of taxes on distributions for shareholders. Dividends are taxed as ordinary income, whereas capital gains are frequently taxed at a special rate that is lower than ordinary tax rates. If dividends are low or nonexistent, investors may choose to supplement current cash flow by selling shares of stock and being taxed at the (sometimes) lower capital gains rate, or they can delay cash flow and thus delay payment of taxes. By making a zero or small dividend distribution, the firm allows the shareholder to determine the timing of cash flow and taxes from stock ownership. Second, lower dividends today allow for higher potential future returns for shareholders. By making low or no dividend payouts, the firm can reinvest more money into the firm and thus provide for more rapid growth. Finally, there is less need for additional costly outside financing if firms use internally generated funds for growth rather than incurring the cost and process of external funding.