dividend policy

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What is stability in dividends means::

What is stability in dividends means: The term stability of dividends means consistency in the payment of dividends, It refers to regular payment of a certain minimum amount as dividend year after year..

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How should the balance be struck? ; That is, how stable and dependable should a firm attempt to make its dividends? Although it is impossible to give a definitive answer to this question, the following points are relevant: Virtually every publicly owned company makes a 5- to 10-year financial forecast of earnings and dividends. For a "normal" company, such forecasts typically project higher earnings and dividends.

Dividend stability has two components::

Dividend stability has two components: How dependable is the growth rate? How dependable is the current dividend? That is, can investors at least count on receiving the current dividend in the future?

Stable dividend can be in the form of::

Stable dividend can be in the form of: 1. Constant dividend per share : The company pays a certain fixed amount per share as dividend. 2. Constant percentage: This policy involves the practice of a consistent payout ratio, the amount of dividend fluctuates in direct proportion to the earnings of the company.

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3. Stable rupee dividend plus extra dividend: In case of this policy, the firm usually pays fixed dividend per share to the shareholders. However, in periods of market prosperity, additional or extra dividend is paid over and above the regular dividend.

Significance of Stability of Dividend :

Significance of Stability of Dividend

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Confidence among Shareholders: A regular and stable dividend payment may serve to resolve uncertainty in the minds of shareholders. 2. Income Conscious Investors: some investors are income conscious and favor a stable rate of dividend. A Stable dividend policy may also satisfy such investors.

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3. Stability in Market Price of Shares: Other things beings equal, the market price very with the rate of dividend the company declares on its equity shares. 4. Encouragement to Institutional Investors: A stable dividend policy attracts investments from institutional investors.

Danger of Stable Dividend Policy::

Danger of Stable Dividend Policy: Stable dividend policy may sometimes prove dangerous. Once a stable dividend policy is adopted by a company, any adverse change in it may result in serious damage regarding the financial standing of the company in the mind of the investors.


CONCLUSION: Most observers believe that dividend stability is desirable, even though statistical problems prevent empirical tests from proving the point. If this position is correct, then: Investors would prefer a stock that pays more predictable dividends to one that has the same expected present value of dividends but pays them in a more erratic manner. This means that the cost of equity would be minimized, and shareholder wealth maximized, if a firm stabilizes its dividends as much as possible, given its requirements to support capital growth.