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2. Dividend preference theory (bird-in-the-hand theory) Aa Aa E 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 investor's preference for dividends. Indicate whether the given factors are likely to make an investor prefer to receive more or fewer dividends. Investors will likely Prefer ... More Dividends Fewer Dividends Factor Investors believe in the bird-in-the-hand theory. Investors expect a reliable annual cash flow from their stock portfolios. Dividends are taxed in the year in which they are received, whereas capital gains are taxed when the stock is sold. 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: Corporate investors in common stock may exclude 70% of their dividend income from taxes. Based on the factor described, identify whether corporate investors, in general, will tend to favor high or low payout ratios. Favor a low payout Favor a high payout