If a firm pays out all of its earnings as dividends and its stockholders then elect to have all of their dividends reinvested, the company should reconsider its dividend policy and possibly move to a lower payout ratio.

Question

Quizplus · Accepted Answer

If all earnings are being reinvested, it may indicate that the company has growth opportunities that would be better served by retaining earnings rather than paying them out as dividends. In this case, the company may benefit from a lower payout ratio to retain more earnings for future investments in growth.

If a Firm Pays Out All of Its Earnings as Dividends