Which of the following statements is correct?
A) One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.
B) If a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should NOT follow the strict residual dividend policy.
C) If a firm follows a strict residual dividend policy, then, holding all else constant, its dividend payout ratio will tend to rise whenever the firm's investment opportunities improve.
D) Despite its drawbacks, following the residual dividend policy will tend to stabilize actual cash dividends, and this will make it easier for firms to attract a clientele that prefers high dividends, such as retirees.

Question

Quizplus · Accepted Answer

Dividend reinvestment plans do not allow investors to avoid taxes on dividends. A strict residual dividend policy would not align with a high dividend payout preference. A strict residual dividend policy would decrease the payout ratio with more investment opportunities. The residual dividend policy does not stabilize dividends.

Which of the Following Statements Is Correct