Bird In Hand

Bird in hand is a theory that was made to combat its rival, the dividend irrelevance theory.

Before we get into the boxing ring with these competing theories, let’s get some facts straight. When investors buy stocks, they’re looking to make money, either through dividends or capital gains. Dividends are payouts made to the investor, which can be reinvested if the investor decides to play it cool and be a long-term investor. Capital gains is the money investors make when they buy a stock low and sell it high, pocketing the difference.

Back to the show: the dividend irrelevance theory says that investors see money as money. They don’t care whether it comes from dividends or capital gains. The bird in hand theory argues otherwise. It says that investors like dividends better since they’re more certain than capital gains. For instance, if the stock market crashes when you’re looking to cash out on your stocks, you could be selling your stocks at a loss, which means negative capital gains. This isn’t a problem with dividends, which pay out regularly. Which kind of investor are you, young grasshopper?