2. Dividend preference theory (bird-in-the-hand theory)

Despite some theoretical assertions, many investors do care a great deal about dividends. They believe that sure dividends today (a bird in the hand) are less risky than a return in the form of capital gains in the future.

The following table lists some factors that might affect an investors preference for dividends. Indicate whether the given factors are likely to make an investor prefer to receive more or fewer dividends.

more or less

Factor	Investors Will Likely Prefer . . .
	More Dividends	Fewer Dividends
With capital gains, shareholders in high tax brackets have the ability to defer taxes into the future.
An investor is on a fixed income and depends on returns from investment.
Risk averse investors prefer to minimize uncertainty with their expectations of income from their investment.

In examining investors preferences for dividends, it is useful to begin with the concept of dividend irrelevance. Dividend irrelevance suggests that in a world with no taxes or brokerage (or transaction) costs, firms and investors are indifferent to the paying or receiving of dividends.

However, as these restrictions are relaxed, various factors suggest that firms should pursue high or low payouts. One such factor is:

Dividends received far into the future are significantly more uncertain than dividends received in the near future.

Based on the factor described, investors, in general, will tend to favor a (high or low) payout ratio.