To aptly comprehend this notion, let us digress a bit to understand how companies raise capital from the stock market. Looking at it by and large, one economic agent (the company) borrows money from another agent (shareholders) to meet its current demands for liquidity. The investors extend the credit line as they expect to benefit from the company’s future cash flows.
Now let us envisage a young, promising professional , with a sound educational background and a bright, prosperous future ahead of him. He starts (or rather shoots off) off his career with a salary of TK 40,000 and expects his income to rise at an average rate of 10 % per annum over his 30-year career. A little bit of napkin calculation tells us that his expected life-time income stands at Tk 3.2 crores. Now he can aggregate a portion of this life-time income, chop it off into shares and sell it in the stock-market. Let’s assume that this individual agrees to pay out 10 % of his annual income (Tk 32 lacs) as dividend. Due to the higher volatility of this investment, the share price would adjust to make it a high return investment. In this manner, he can raise around Tk 1.5 crore from the stock-market to produce a yield of 20 %. The investors are happy because they earn a higher rate of interest (the higher rate of interest covers adequately for the ultimately defunct value of the shares). The young man is happy for obvious reasons (he is now young, well-educated, promising & rich-an irresistible combination).
Surely in practice, development of such financial instruments would involve more careful deliberations. However, what I have tried to prove here is that, in principle, the idea is tenable.