dividend irrelevance vs bird in hand

How does the bird in hand theory oppose dividend irrelevance.

Dividend irrelevance theory states that " people are indifferent tot he dividend payout plicy since the investor could create his own dividends by selling out the stocks if he wants to create them and will effectively be left with less anmount of stocks than would have been if not sold"

Now the bird in hand theory " People prefer dividedns more than the capital gains so they prefer the dividend payout policies and hence the dividend payout ratio effects the stock price"

What i fail to understand is why cant investor create his own dividends under the bird in hand theory. I mean okay he has a preference to the certain cash flows from dividends rather than uncertain capital gains in that case he can simplay sell the stocks for equivalent amount of dividends and be left with same value that he would have been incase the dividends were paid out( return of capital from the company is reflected instantly in the stock prices)

Dividend irrelevance theory is based on the fact that stocks are not valued differently based ont heir dividend payout policies because investors can create their own dividends. So can in the bird in hand theory.

Can somebody please specify what am i missing?

Peaple the irrelevent for the dividend to be paid. They can get it by selling the stock out . Whereas bird in hand theory states that any figure in hand is more valuable than what what is likey to be recieved in future . Like dividend in hand is much more valuable .

To me, the two does not necessarily have to come into conflict. A proponent for the bird in hand theory would agree that homemade dividends can be made, but the bird in hand would go further to say that there is more value to have the dividends paid out vs. capital gain for an investor so he can have more control. For such reasons they would advocate for lower tax on div as opposed to capital gains.

Exactly. so what i am saying is, if a guy values return in hand more than tied to the capital he can freely sell the stocks cant he, to the point where he is now indifferent to the tied capital and capital in hand. treades are free of cost.

Please someone could help us on this ? I had the exactly same problem than the initial question :slight_smile:

Is it just a question of taxes between capital gain and dividends ? if it is so, neither CFAI or Schweser say it



I think it comes down to the required return on equity. MM pretty much says that dividend policies have NO EFFECT on the required return on equity capital. Then these Gordon and Lintner dudes come outta nowhere and say that the required return on equity decreases as dividend payout goes up.

Dividend irrelevance says you sell some of your infinitely divisible shares and reinvest them, but the return on this investment AINT GUARANTEED YO

Dividends on the other hand are guaranteed returns

I think we main difference between the 2 comes down to required return and guaranteed/unguaranteed returns

Dividends are not guaranteed returns especially not for ordinary stocks.

Ya but Gordon and Linter were talking about current dividend payments, not expected future dividends

So what you know you will receive currently holds a higher weight than expected capital gains

who knows! I could be completely wrong! but that was my interpretation based on the reading

I believe the factor that the 2 theories compare is capital gains vs dividends.

MM assumes effecient markets, no taxes etc.

The bird in the hand theory doesn’t.

With the MM theory, dividends and capital gains are interchangeable.

With the bird in the hand theory, capital gains are seen as a future occurrence whereas dividends are seen as a present benefit. It also doesn’t assume efficient markets.

With these 2 additional assumptions or lack there of, dividends can be seen as something that is inherently more certain or less risky compared to capital gains that can be seen as being uncertain or more risky.

Also, since there is market price fluctuation, you wouldn’t nt be able to exactly replicate a dividend payment and even if you did sell stock to create a dividend, it wouldn’t t hold an identical value to what your initial assumed dividend value would be going forward.

This is my understanding of this topic.