Bird In Hand
The bird in hand is a theory that says investors prefer dividends from stock investing to potential capital gains because of the inherent uncertainty associated with capital gains. Based on the adage, "a bird in the hand is worth two in the bush," the bird-in-hand theory states that investors prefer the certainty of dividend payments to the possibility of substantially higher future capital gains.
Bird-in-Hand Theory
Definition
The Bird-in-Hand Theory is a financial theory that suggests investors prefer dividends from stock investments over potential capital gains. This preference arises because dividend payments are certain, whereas capital gains are inherently uncertain. The theory's name comes from the proverb 'A bird in the hand is worth two in the bush,' indicating that certain returns are more valuable than uncertain ones.
Origin
The Bird-in-Hand Theory was first proposed by financial scholars John Lintner and Myron Gordon in the 1950s. Their research showed that investors tend to favor companies that pay stable dividends over those that reinvest profits in hopes of future capital appreciation.
Categories and Characteristics
The Bird-in-Hand Theory primarily divides stocks into two categories: high-dividend stocks and low-dividend stocks. High-dividend stocks are usually issued by mature, stable companies with consistent cash flow and profitability, enabling them to pay regular dividends. Low-dividend stocks are typically issued by growth companies that reinvest most of their profits into business expansion, aiming for future capital gains.
High-dividend stocks are characterized by lower risk and stable returns, making them suitable for risk-averse investors. Low-dividend stocks, on the other hand, are characterized by higher risk but also higher potential returns, making them suitable for investors with a higher risk tolerance.
Specific Cases
Case 1: An investor chooses to invest in a large utility company that pays stable annual dividends. Although the company's stock price grows slowly, the investor receives a steady dividend income each year, aligning with the Bird-in-Hand Theory.
Case 2: Another investor opts to invest in a tech startup that reinvests most of its profits into R&D and market expansion. While the company's stock price has the potential for significant growth, the lack of dividends means the investor must bear higher risk.
Common Questions
1. Why do investors prefer dividends over capital gains?
Answer: Because dividends are certain, whereas capital gains are uncertain, making investors more inclined to choose certain returns.
2. Is the Bird-in-Hand Theory applicable to all types of investors?
Answer: No, it is not. The Bird-in-Hand Theory is more suitable for risk-averse investors, while those with a higher risk tolerance may prefer to pursue capital appreciation.
