Explain the arguments in favour of a stable dividend policy.

      

Explain the arguments in favour of a stable dividend policy.

  

Answers


Kavungya
(1) Desire for Current Income: Some investors like old persons, widow's etc. desire to get
stable current income to meet their living expenses. They invest their savings in shares with
a view to get regular income for their living. If they get low dividend, they would be
compelled to sell some of their shares to meet their living expenses. So they would prefer to
invest in shares of those companies which pay regular and stable dividend and would be
prepared to pay a little high price for shares of such companies.

(2) Removes Investors' Uncertainty: The stable dividend policy removes uncertainty in
investors' mind about dividend payment. Even if the earnings of the company decline and
the company continues to pay the constant amount of dividend, it would indicate that the
management views the bright future prospects for the company. Thus, the changes or no
changes in dividends work as a source of information about firm's profitability.

(3) Additional Finance: The credit standing and prestige of the company paying stable
dividend increases in the eyes of the investors. When the company wants to raise additional
finance, investors would be willing to buy its shares or debentures. Particularly, small
investors requiring regular income would like to invest their savings in shares of companies
paying stable dividends. Even the preference shares and debentures of such companies
would be easily subscribed, as the investors feel that such company would pay regular
interest or dividend.

(4) Ploughing back of Profits: A company paying a reasonable proportion of stable dividend is
able to retain good amount of profit with it, which it can plough back in the business. It is
not compelled to resort to external financing for expansion purposes. The well-known large
companies follow this stable dividend policy with great care and caution. Hence, they can
use their retained earnings for future expansion.

(5) Stable Share Prices: A company paying regular and stable dividend has a high credit
standing in the financial market and its share values remain at a high level. Besides share
prices remain stable over a period of time and do not fluctuate violently as in case of other
speculative shares.

(6) Leads to Management Efficiency: As stable dividend policy implies regular payment of
dividend, the company has to earn profits every year which makes management more
conscious towards their duties. This would lead to more efficient management
Kavungya answered the question on May 5, 2022 at 13:45


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