According to the famous Modigliani-Miller theorem, under certain idealized conditions it doesn’t matter if firms pay dividends or not. One of those idealized conditions involves ignoring tax considerations. Since in the real world there are taxes, dividend payment issues make a big difference.
And one intriguing development is that ahead of the “fiscal cliff,” lots of firms with cash on their balance sheets are issuing special one-off dividends to make sure that shareholders are able to lock today’s low tax rates into place. Markit says that a record 103 companies have already announced plans to do this. It’s an intriguing development. For a while now people have been wondering what, if anything, would get corporate cash “off the sidelines” and into the investment arena. But the special dividends path is an alternate way of doing it. Rather than investing the idle money, firms can disgorge it to their owners who’ll transform it into luxury durable goods (fancy cars) and residential investment (fancy houses) with the rising demand for those items—rather than corporate investment—being the demand driver.