–          The net result of changing a company’s dividend is the substitutability of capital gains (i.e. share value increases) as the dividend is reduced for cash when it is paid.


–          Increased dividends = decreased market value, and vise-versa.

–          Truly organic for the company: if dividends are changed, and no other action undertaken, the company’s investments will also change. Using above diagram, an increase in dividends would be shown as a widening of the dividend pipe and a narrowing of the retention pipe resulting in a smaller investment amount.

–          To isolate the effect of dividend choices, the company’s investment plans must be kept intact as dividends change.

–          Increase in dividends = increase in new equity (more shares issued)

–          Decrease in dividends = decrease in new equity (less shares issued)

–          The company share value in total is unchanged, therefore existing shareholder wealth is the same.

–          When the effect of company financial decisions upon shareholders portfolios can be undone by the offsetting actions of shareholders, the company financial decision is irrelevant!


The following two tabs change content below.
We, at BMS.co.in, believe in sharing knowledge and giving quality information to our BMS students. We are here to provide and update you with every details required by you BMSites! If you want to join us, please mail to [email protected]

Leave a reply

BMS.co.in is aimed at revolutionising Bachelors in Management Studies education, also known as BMS for students appearing for BMS exams across all states of India. We provide free study material, 100s of tutorials with worked examples, past papers, tips, tricks for BMS exams, we are creating a digital learning library.

Disclaimer: We are not affiliated with any university or government body in anyway.

©2020 BMS - Bachelor of Management Studies Community 

A Management Paradise Venture

Ask Us On WhatsApp

Log in with your credentials


Forgot your details?


Create Account