Machine Learning

The purchase of stock is expensive It is more expensive than the purchase of bonds The dividend that is paid from the firm to the shareholder is much less expensive than the purchase of stock Thus, if the firm cuts its dividend it will not be able to sell as many shares of its stock as it otherwise would have sold The firm may not be able to raise enough money to finance its investment plans In general, the firm will want to pay out a dividend that is large enough that the stock price is above its normal (equilibrium) price The firm will want to avoid a dividend cut For example, if the firm's stock is selling at $100 per share, the firm will want to pay a dividend of $2 50 or 3 percent This is just enough to keep the stock price above $100 If the dividend is cut to, say, $1 50, the stock price will drop, perhaps to $90 The firm will experience a stock turnover, and thus a loss of potential revenue from the sale of the stock The dividend cut will have hurt the firm The dividend payout ratio is one