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10: Dividend Policy - Coggle Diagram
10: Dividend Policy
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ii. Dividend policies
Investment decision
-> if cmpany is going through to a growth phase, it is unlikely to have sufficient liquidity to pay div. because of the need to inv. in nca.
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Shareholder expectations
Signaling = inv. are always hungry to discover their company's prospects - they know directors will try to avoid cutting div. and therefore they may interpret div. payments as follows:-
-> if profits fall and div. payments are maintained, the fall in profits is temporary.
-> if profits falls and div. payments are cut, the fall in profits is likely to be sustained.
Clientele theory
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-> company has a reputation 4 high div. and to maintain that, their s/h probably bought the shares for the high div.
-> company has a very low div. preferring to invest the money and see the share price increase - their s/h would expect and want this.
--> or the companies can then sell their shares at a higher price (if they wish) and create a div. for themselves that way - sometimes called aa s home-made div.
Types policy:-
Constant payout ratio - pay div. at a 50% of profits consistently and div. payment can create a volatile div. movements if profits are unstable.
Stable growth - div. are increased at a constant percentage of growth every year. (also called as constant growth)
Residual policy - div. are not connected with the reported earnings, (ie only pay div. once investments plans are budgeted for)
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