Near Vs Distant Dividend
One aspect of the uncertainty situation is the payment of dividend now or at a later the used to near dividend. If, however, the net earnings are retained. This shareholders, would be entitled to receive a return after some time in the form of price of shares (capital gains) or bonus shares and so on. The dividends may, then be referred to as capital or future dividend. The crux of the problem are the investors indifferent between future dividend would they prefer one over the other? According to Gordon investors are not indifferent, rather, they would prefer near dividend to distant dividend. The payment of dividend is uncertain, how much dividend and when it would be paid by the firm to the investors cannot be precisely forecast. The longer the distance in future dividend payment, the higher is the uncertainty to the shareholders. The uncertainty increases the risk of the investors. The payment of dividend is not associated with any such uncertainty. In other words, investment of immediate dividend resolves. uncertainty. The argument that near dividend implies resolution of uncertainty is referred to as the bird in hands argument. This argument is developed in some detail in the later pan of this chapter. In brief, since current dividends are less risky than future distant dividends, shareholders would favour dividends to retained earnings.