Dividends $-$ Love them or Hate Them?

Corporate Point of View

A dividend policy is created by the company's board of directors. When the policy is first created, it is usually created as a low percentage of the previous year's net income. It is intended as an inducement for investors to share in the cash flow which the company earns each year. When companies are in the early, growth stage, they usually don't pay any dividends out as they have lots of ideas on where to spend on capital expenditures which will increase the overall rate of return to the company. Think of Google $($Alphabet$)$ or Amazon.

At some point, they can share some of that cash flow with the owners, stockholders, as an inducement to maintain their position with the company over time. It is a market price killer to reduce the the amount of the dividend or to suspend it once it is started. Think of Walgreen's at the end of $2023.$

Investor Point of View

In addition to the capital appreciation return by having the stock price go up$,$ the investor wants to have some cash flow from the company to add to this return expected from the company over the long$-$term. Think of the discounted cash flow of earnings, plus the expected cash flow from capital appreciation that makes for a more consistent, less risky, point of view. Think of McDonald's or Johnson & Johnson. However, the most important consideration which an investor appreciates about a dividend policy is it forces the company to deploy its capital more efficiently and not to overpay for acquisitions or start$-$ups that our very much the long shot.

Keep in mind, dividend payments come from retained earnings. They are not deductible by the company, but they are taxable to the individual investor. The reinvestment risk of getting dividends reinvested is a burden on the investor as they must either spend the dividend or find a new place to invest it for the return to continue compounding.

What's the difference between a company paying dividends or a stock buy$-$back program by the company?