Introduction
Investment strategies tend to play a very important role in determining the overall returns that can possibly be generated from a certain investment.
Amongst the wide variety of options that investors have relating to how they can possibly tackle their investments, it can be seen that they have an option to either cash in on their investments in the short term, or hold them for a longer-term for even better returns.
Theoretically speaking, it can be seen that dividend policies, and the fact that drawing dividends depends on the personal preference of the investors, and their expectation thresholds from the investment proposal that is drawn.
As a matter of fact, there is no doubt to the fact that this also varies from person to person, and therefore, this is something that should be considered when it comes to determining the best course of action that can ideally be taken when it comes to deciding on investment strategies.
Dividends Vs Reinvestment
Speaking of dividends, it can be seen that they are probably the most favorable option for those who have an appetite for short term financial gains as an outcome of the stock investment.
This appetite is not to be generalized, and it can be seen that dividend payouts often act as signaling in a positive manner because they reinforce the investor confidence that the company is doing well.
It also reflects on the company’s ability to generate profits, which is promising for the future outlook.
In the same manner, it can also be seen that dividends tend to act as a testament regarding the performance of the company, and how it has managed to generate positive returns as a result of the investment that is drawn.
On the contrary, it can be seen that reinvestment has different objectives and motifs, predominantly on the grounds of long-term impact it is meant to have for the company.
Organizations mostly retain their finances for reinvestment in order to ensure that they are able to expand their operations, or invest into some business deal that is probable to exponentially increase their profitability over the course of time.
Hence, there is no doubt to the fact that this is a clear plus for the company, and it tends to offer promising avenues for the investors in the longer run, because it is likely that profitability is going to exponentially increase over the course of time.
Reinvestment, just like dividend payouts, also have a signaling affect. While in most cases, it is expected that reinvestment strategies are likely to be appreciated by investors.
This is because they are likely to rely on the future prospects of the company, and the value addition that is going to subsequently follow after the reinvestment has been subsequently been executed.
However, on the other hand, reinvestment strategies can also pose to be a threat in certain ways. This is because of the fact that certain investors tend to be doubtful regarding why company has retained dividend payouts, and if everything is fine within the company.
If the strategy is not communicated properly, and in advance, this might result in unwarranted anxiety within the investors, regarding the viability of their outcome.
Dividends or Reinvestment – what is better?
As mentioned earlier, it can be seen that dividend payouts, as well as reinvestment strategies tend to have their ups and downs.
Therefore, it is rudimentary to realize that both these options can equally be considered as promising for investors.
From an investors’ perspective, there are a couple of theories that can be used to explain their preference. These theories are explained below.
Firstly, there is Bird in Hand Theory. This dividend theory speaks that the dividend payout tends to be more motivating from investors perspective because of the reasons vested in finance theories, relating to Time Value of Money, and other relevant finance concepts.
It speaks of how money in hand is worth more than money that is to be received in the foreseeable future. This is a relatively risk adverse approach, and keep the investors interest intact in their relevant investment.
On the other hand, there are other growth-related prospects that need to be considered when it comes to dividend and reinvestment strategies.
A way to look at this is the fact that if the company retains their earnings for purposes of reinvestment, it is likely that they would have promising prospects in the future.
As a result of this, it can be seen that as a result of growth in investment in the company, the investment is likely to exponentially increase in the market.
The growth prospects can also tend to be appealing for the investors because it increases their investment considerably, and this can lead to higher returns in the future, in comparison with immediate dividend payouts.
Conclusion
Therefore, it can be seen that dividends and reinvestment can be considered to have their positives and negatives in terms of extrapolating positive returns.
As a matter of fact, it can be seen that dividend payouts tend to be plausible for the shorter term. This is perhaps a good option is the company is mature enough, and expansionary opportunities are somewhat limited.
This would be appealing because of the reason that short term dividends would keep the investors happy and content in terms of their investment.
On the contrary, reinvestment can be referred to be ideal for investors who are not in investments for longer term.
This is because reinvestment strategies are often referred to as long strategies, which tend to benefit shareholders over the longer course of time.
However, what needs to be highlighted here is the fact that reinvestment might not always render the desired results, and therefore, this is something that should be considered by these investors.
The risk return phenomenon in this regard is also helpful to gauge and determine the return that is likely to be generated as a result of this investment, and if investors are aligned in this regard.