The marshmallow test is one of the most well-known child psychology studies. Designed to test delayed gratification, each child is left in a room with one marshmallow and promised a second if they manage to resist the temptation to eat the first while they wait. How would you have done on the test as a child? How would you do as an adult? And if we replaced marshmallows with dividend payments, would you be a patient investor and accept less cash now on the promise of better long-term returns? Corporations reward shareholders for investing in their companies by distributing a portion of their profits back to them as dividends and every year the financial markets eagerly await payout announcements. A number of big names are expected to make dividend payments in April (you can view some of them here). No doubt they will attract public criticism, but they are also considered a sign of how well a company is performing. Though they often attract bad press, the reality is that paying dividends to investors is an essential part of the way the economy works. Without investors’ cash the global economy would grind to a halt. The more capital a business has, the more opportunity it has to grow, become profitable, create jobs and generate wealth. We need our companies to have healthy dividend yield rates to attract investors. The problem starts when those yield rates are not an accurate reflection of how well a company is doing, and are even incentivising the kind of short-term wealth-extraction behaviour which damages a company’s performance and overall stability in the long-term.
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