4. Clientele effect Different group

4. Clientele effect
Different groups, or clienteles, of stockholders prefer different dividend payout policies.
Stockholders in their peak earning years might prefer reinvestment, because they have less need for current investment income and would simply reinvest dividends received—after first paying income taxes on those dividends.
If a firm retains and reinvests income rather than paying dividends, those stockholders who need current income would be disadvantaged. The value of their stock might increase, but they would be forced to go to the trouble and expense of selling some of their shares to obtain cash.
Some institutional investors would be legally precluded from selling stock and then “spending capital.”
Stockholders who are saving rather than spending dividends might favor the low-dividend policy: the less the firm pays out in dividends, the less these stockholders will have to pay in current taxes, and the less trouble and expense they will have to go through to reinvest their after-tax dividends.
Investors who want current investment income should own shares in high–dividend payout firms, while investors with no need for current investment income should own shares in low–dividend payout firms.