Question: A dividend paying company has a current dividend yield of 8

A dividend-paying company has a current dividend yield of 8 percent and a stock price of $100. The company has paid the same dividend for the past 15 years and it is not expected to change. Alice believes that the company is an excellent investment opportunity for her clients and has been contacting them. Here are some of the responses she has received:
Client A: I need income, I don’t trust capital gains—they aren’t real, just paper. I’m not interested in this stock; I’d rather just have a bond and get a nice fixed income.
Client B: Who cares about dividends? I pay more taxes on the dividends so I want capital gains where I can control the timing of the tax bill. The dividend is too high, and I will pay too much tax so I’m not interested in the stock.
a. Which statement is consistent with the “bird in the hand” argument about dividends?
b. Describe how income stripping would allow Alice to satisfy the needs of both clients.

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  • CreatedFebruary 25, 2015
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