As one statement says, "to pay dividends is a decision not to reinvest this same cash into the firm. If you pay out dividends the less internally generated funds you have to both maintain ongoing operations, and possible expansion through new capital investments and acquisitions. The dividends lead to less internally generated equity capital is available and the smaller the firms capital budget.

Under the residual theory of dividends is that investors are as well or better off if the firm retains and reinvests internally generated funds instead of paying them out, provided the investment opportunities face the firm are at least as good as those facing investors.

1) Establish the optimum capital budget (accept all projects with positive net present values).

2) Determine the amount of common equity needed to finance the new investments while maintaining the firm's target capital structure.

3) Use internally generated funds to supply this equity whenever possible.

4) Pay cash dividends only to the extent that internally generated funds remain after taking all appropriate capital investment opportunities.

Under signaling theories it is better to use internal generated funds then issuing new stock for a new project. Under one of the Signaling theories if we issue more stock for a new project it sends a message that it is not that good of a project due to we were not willing to sink our own money into the project.

It also may be that by the clientele effect that, our clients may prefer that we invest money to that in long run the stock will be worth much more for those in it for a long haul.

Also to issue more stock is to lose the amount of control you have over the company. If you had 5% control today and we sell more stock you may only have 1% control tomorrow.

Finally lets look at the option of Stock repurchases. Some of the advantages are:

1. If a firm had a temporary excess of cash being generated but did not want to adjust its stated cash dividend policy, it might decide to repurchase some of its stock. This repurchase provides non-selling stockholders with an alternative form of a dividend.
2. By repurchasing, a firm may reduce its future cash dividend requirements or alternatively , may raise the dividends per share paid to its remaining stockholders without increasing the total cash flow drain on the firm.
3. Repurchases can be used to effect an immediate and often large-scale change in the firm's capital structure.
4. Repurchasing can also be used to signal information about the firm's future cash flows. Only firms that expect substantial cash flows can confidently announce they will repurchase their stock.

These are some of the reasons why dividend levels should not be increased.