The Impact of Dividend Reinvestment Plans on Firm Payout Choices—Evidence from Real Estate Investment Trusts

Abstract

This study investigates whether firm dividend payout choices are influenced by the presence of a Dividend Reinvestment Plan (DRIP). Given that DRIPs help retain capital, we show that dividend-paying firms with a DRIP will tend to pay a high dividend and maintain a stable payout policy. Using a multinomial logistic model, we show that in comparison to REITs without DRIPs, REITs with DRIPs have a higher payout ratio and are less likely to: (1) pay regular dividends with extra dividends and share repurchases, (2) distribute extra dividends, repurchase shares, yet omit regular dividends and (3) omit all payouts. In addition, we find that REITs with a capital-retaining DRIP invest more aggressively and such increased investment activities are undertaken without raising the reliance on external financing.

Application of the classical Payout Ratio Model and determination of the limitations of the Lintner Model demonstrated on the example of Komerční banka, PLC

“…In order to achieve a higher level of business growth, companies should pay fewer dividends to their shareholders. Bond et al [9] came to different conclusions compared to this study. They examined whether dividend payout options are affected by the presence of a dividend reinvestment plan (DRIP), and concluded that companies paying dividends with DRIP tend to pay high dividends and maintain a stable payout policy.…”

“…These results would thus be unsustainable in the long run, as the company would pay more in dividends than it earns. Hanousek and Tresl [9] also concluded that Lintner's model indicates a shift over time to a higher target payout ratio and the absence of payment smoothing. When choosing the application, companies should choose several models for determining the payout ratio and compare them based on the results obtained.…”

Fixing a payout ratio by dividend policies: a case of the utility sector

“…Farooq and Ahmed (2019) reveal that the presidential election period has a deep impact on the American market when companies pay increased dividends contrary to common seasons. The next hypothesis aims at the influence of reinvestment dividend schemes in publicly negotiable corporations, analysed by Bond et al (2019), suggesting that enterprises re-investing dividends rely less on external funding, which at the same time leads to more aggressive investments, contrary to firms paying only financial dividends.…”

Homemade equity offerings via dividend reinvestment and stock purchase plans

“…REITs frequently access external financing to raise capital due to their reduced ability to retain cash flow from operations. Bond et al (2019) find that REITs with DRSPPs tend to pay a high dividend and maintain a stable payout policy. Therefore, studying the two different types may provide innovative insights into why firms adopt DRSPPs.…”