A low payout on investments makes sense at certain times and in certain circumstances. Individuals or entities that receive a lower payout are oftentimes doing so to address issues such as higher tax rates and a deferred tax liability. If the investor's tax rate from income is lower than the tax rate for capital gains, then it makes complete sense to take a lower rate of payout because it saves the investor money on taxes.
Another reason for accepting a lower yielding investment from a business viewpoint is that it can decrease the amount of capital that needs to be raised for certain projects or investments. As one recent study determined "there is extensive literature in corporate finance on the proper way to incorporate flotation costs in the determination of project net present values (NPV)" (Simonds, 2006, p. 25). If a company's flotation costs can be lowered through the use of low-yielding investments (viewed as more secure), then the NPV of a project is positively affected, which makes it easier to raise capital for the project in the first place.
Additionally, there are contracts that are written that limit the percentage of income that can be paid out to beneficiaries; these contracts call for lower-yielding investments that may be considered more conservative in nature, and limit the amount that investors or beneficiaries can receive before the underlying contracted debts are paid.
Benefits to the investors include the safety factor of the underlying investments, and the investments usually grow at a much slower rate based upon the perception that they are less risky than the higher yielding investments.
If an individual investor could invest funds with little expense, and receive a high rate of return, that would likely seem one of the surest bets in the market.
There are plenty of investors that are willing to take that bet, and make that type of investment. A high…
Sources Used in Document:
Economist, (2006) Instant returns, Vol. 381, Issue 8498, pp. 80
Simonds, R.R.; (2006) Income capitalization, flotation costs, and the cost of capital, Journal of Property Tax Assessment and Administration, Vol. 3, Issue 4, pp. 23 -- 29
Capital Structure and the Dividend Policies
Investment in firms
Impact of taxes
Impacts of bankruptcy
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