Question

Why may stockholders prefer cash dividends to reinvestment?

1) Cash dividends provide immediate income for stockholders
2) Reinvestment may involve risk and uncertainty
3) Stockholders may have other investment opportunities
4) All of the above

Answer 1

Stockholders may prefer cash dividends over reinvestments as they provide immediate income, involve less risk, and allow for flexibility in pursuing other investment opportunities.

Step-by-step explanation:

Stockholders may prefer cash dividends to reinvestment for several reasons. Cash dividends provide an immediate source of income, which can be particularly appealing for investors who rely on their investments for living expenses or who prefer to have control over their income stream. In contrast, reinvestment represents an automatic plow-back of earnings into the business, which involves risks and uncertainty regarding the future performance of the company. Furthermore, stockholders might have other more lucrative investment opportunities they would prefer to pursue with the cash received from dividends. Therefore, the option to receive dividends gives stockholders flexibility and mitigates the risk of having their returns tied up solely in the future success of one company.