To eat or not to eat the cake!

If you had the power that the cake in front of you

- will always stay fresh

- and if you did not eat it, it will keep growing (till you eat it!)

what would you do?

Similarly, would u like the company (whose stock u have invested in)

to pay out their surplus cash as dividend

or

plough back the surplus cash into the business to grow it?

If they infuse it into the business as capital

they are doing good by keeping the debt down and hence interest costs also!

Besides, they are growing the business and thus ensuring bigger profits and better dividend promise in future besides ensuring safety from competition by increasing the market share!

As an investor, you may want the company to grow and capture market share

and thus unlock the hidden potential of the business

besides zooming the share value of the company!

While dividend is instant gratification of the share holder's taste buds

share price rise is the sweetest thing for the investor.

In these days of Mergers and Acquisitions, companies need cash "warchest" to acquire the target companies. This cash can come from the surplus or from fresh debt.

Investors are generally less comfortable with debt.

(Ofcourse, investors will not be too happy if the company is debt-free, as this indicates that either company has no or weak future plans or is not taking the benefit of the loan facility available. Share holders don't want too many share holders around to share the dividend. So they want the company to take loan for short term requirements. Once these loans are repayed, the original share-holders are happy to be alone in the ownership space!)

When I entered stock market world many years back I had heard that majority people trade for share price rise rather than for dividend.

However, if you are lucky you can get both as in case of Sesa Goa, Hero Honda, Yes Bank etc.

On the other hand, there is a big segment of investors including FIIs and retail investors (directly or thru specific Mutual Funds etc.) which invest in anticipation of regular income in the form of dividends!

To book profit generated due to share price rise, you have to sell the share, but for dividend you don't have to sell the shares. Investors can thus stay with the company in its growth journey while having regular cashflow as well.

Also, dividend is a feel-good factor for investing public. Good and growing companies which are not paying dividend are looked at with synicism by a segment of the public. Dividend is seen as an incentive for the investor to wait for the ultimate reward - share price bloom!!! However, too much of dividend payout is also not a good indicator of companies state of affairs.

Every company wants funds for future growth. Fresh equity floating is a cheap and easy way out. Companies want to keep retail investors as well as Dividend Mutual Fund Managers happy so that they are ready to invest next time company needs their money.

To eat or keep the cake (which always remain fresh) is a tempting question depending upon the appetite of teh investor.