
This post focuses on the earnings retention rate and its impact on growth. In many previous posts, we have discussed the concept of dividends and dividend policy. Dividends represent the portion of earnings that is available for distribution after the payment of all taxes and accounting for all net reinvestment in the business.
The idea for business owners is to get both sides of this balancing act right. It is good to reinvest for future growth. It is not good to reinvest in unproductive assets. This lowers expected returns and postpones current returns in the form of dividends.
If a business has productive reinvestment opportunities, it is good to try to grow through reinvestment. Reinvestment, as we see, lowers the potential for current returns in favor of future returns gained through growth.
Take your pick. Current returns or future returns or both. Your results will be determined by your earnings retention policy and the mirror dividend policy.