Question

Do you think there are demographic, risk tolerance, investor horizon, and other variables that may affect the validity of the dividend preference theory?

Answer 1

Yes, there are demographic, risk tolerance, investor horizon, and other variables that may affect the validity of the dividend preference theory. Dividend preference theory states that investors are particular about and care a great deal about dividends. The investors, as per the dividend preference theory, believe that dividends today are less risky than future return that will accrue or take place in future as capital gains.

However factors like demographic, risk tolerance, investor horizon, and other variables affect the validity of the dividend preference theory. For instance demographic factors like education level, age, investment income etc. will affect the validity of dividend preference theory. Investors with high education level and high investment income will prefer capital accumulation in the form of stock gains more than getting dividends today. Investors with high risk tolerance will also prefer benefitting from appreciation in stock prices in future over receiving dividends today. Psychological biases changes with age and also risk aversion declines with increasing age, wealth and education of investors. These factors tend to dilute the validity of the dividend preference theory.