I started serious Investing Journey in Jan 2000 to create wealth through long-term investing and short-term trading; but as from April 2013 my Journey in Investing has changed to create Retirement Income for Life till 85 years old in 2041 for two persons over market cycles of Bull and Bear.

Since 2017 after retiring from full-time job as employee; I am moving towards Investing Nirvana - Freehold Investment Income for Life investing strategy where 100% of investment income from portfolio investment is cashed out to support household expenses i.e. not a single cent of re-investing!

It is 57% (2017 to Aug 2022) to the Land of Investing Nirvana - Freehold Income for Life!

Click to email CW8888 or Email ID : jacobng1@gmail.com

Welcome to Ministry of Wealth!

This blog is authored by an old multi-bagger blue chips stock picker uncle from HDB heartland!

"The market is not your mother. It consists of tough men and women who look for ways to take money away from you instead of pouring milk into your mouth." - Dr. Alexander Elder

"For the things we have to learn before we can do them, we learn by doing them." - Aristotle

It is here where I share with you how I did it! FREE Education in stock market wisdom.

Think Investing as Tug of War - Read more? Click and scroll down

Important Notice and Attention: If you are looking for such ideas; here is the wrong blog to visit.

Value Investing
Dividend/Income Investing
Technical Analysis and Charting
Stock Tips

Tuesday 27 July 2010

High Dividend Yield Stocks? - Part 5

Read?  High Dividend Yield Stocks? - Part 4

Read? 6 Common Misconceptions About Dividends

In a later paper, Modigliani and Miller argued that a firm's value is not affected by its dividend policy (payment to stockholders) because increased return in the form of dividends is offset by the reduction in the firm's assets.

Modigliani-Miller theorem

Modigliani and Merton Miller published their famous The Cost of Capital, Corporate Finance and the Theory of Investment in 1958. The paper urged a fundamental objection to the traditional view of corporate finance, according to which a corporation can reduce its cost of capital by finding the right debt-to-equity ratio. According to Modigliani and Miller, however, there was no right ratio, so corporate managers should seek to minimize tax liability and maximize corporate net wealth, letting the debt ratio chips fall where they will. Modigliani and Miller also claimed that the real market value of a company depends mostly on investors' expectations of what the company will earn in the future, not the company's debt-to-equity ratio.

The way in which Modigliani and Miller arrived at their conclusion made use of the "no arbitrage" argument, that is the premise that any state of affairs that will allow traders of any market instrument to create a riskless money machine will almost immediately disappear. They set the pattern for many arguments in subsequent years based on that premise.

The Modigliani-Miller theorem forms the basis for modern thinking on capital structure. The basic theorem states that, in the absence of taxes, bankruptcy costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed. It does not matter if the firm's capital is raised by issuing stock or selling debt. It does not matter what the firm's dividend policy is. Therefore, the Modigliani-Miller theorem is also often called the capital structure irrelevance principle.

The theorem was originally proved under the assumption of no taxes, but can also be extended to a situation with taxes. Consider two firms that are identical except for their financial structures. The first (Firm U) is unlevered: that is, it is financed by equity only. The other (Firm L) is levered: it is financed partly by equity, and partly by debt. The Modigliani-Miller theorem states that the value of the two firms is the same.

Createwealth8888's own words: "I also love dividend play stocks but I treat the dividend as safety net if the stock price falls temporary but not as a buying decision. Technically on chart-wise, I must see that the stock price has the probability of moving higher before considering it in the watch-list."
Read? Are High Ratio Dividend Payout Stocks Make A Low Risk Investment? - Part 2
Who want to argue with the Nobel Prize winner on "dividends are irrelevant to a company's value"?

No comments:

Post a Comment

Related Posts with Thumbnails