Investors preferences and dividend payouts

Abstract

A compelling motivation for dividends remains elusive in the face of double taxation, yet firms continue to pay dividends. This note identifies two previously unrecognized benefits of dividends. First, positive dividends can finance investors preferred consumption streams under some conditions, but the associated payout policy is not unique. Moreover, a specific form of dividend smoothing can facilitate dynamic portfolio insurance when risk-free securities exist. It is not claimed that these benefits solve the riddle of dividends, since both outcomes can be replicated by equity sales, but they do extend the known spectrum of such benefits.