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hi sir, i would like to ask in reality, how do we identify whether the company is following what kind of the dividend theory and dividend policy?
thankss
Dividend theory explains how shareholders react to dividends. It is something the company should be aware of when deciding on the level of dividends, but is not something they follow.
Most large companies state what their dividend policy is in their annual accounts. If not then looking at past dividends is the only way of seeing if they do have any standard policy.
if the company mentions that they will pay a minimum 40% of eps as dividend each year. This kinds of companies usually is adopting what dividend policy?
is tht means this kind of companies are aware of their customers prefer dividends rather than capital gain so most probably they are adopting the bird in hand theory?May I knw cliente effect is considered as dividend relevance theory or irrelevant? OR it is in 2 ways can be relevant or irrelevant depending on the clients that the company is dealing with? for eg, if for big investors is irrelevant, but small investors is relevant since they have no other income.
How about signalling effect, is it also in 2 ways such as if the signal that the company give is reliable then it will be relevant, while if the company give wrong signal so it will be irrelevant since the investors cannot differentiate whether the company is good or bad?
thanks sir.
You are using the wrong words. All we mean by the dividend policy adopted by a company is what they inform shareholders that they intend to try and do. They may intend to distribute all their earnings as dividends, they may intend to distribute 40% of earnings as dividends, they may intend to try and increase dividends by 5% per year – whatever they intend to try and do is their policy and does not have any special name.
Different shareholders will prefer different policies – some classes of shareholders might prefer high dividends and not be worried about capital growth. Other classes of shareholders might prefer to receive lower dividends and as a result get capital growth. So shareholders choose to invest in those companies that are giving what they prefer. This is the clientele effect.
If the company does have an established dividend policy, then the signally effect is relevant if ever they deviate from their policy. For example, if a company has had a policy of increasing the dividend by 5% per year, but then one year for some reason does not increase the dividend at all, then shareholders will immediately assume that there is a problem and react accordingly. This is the signalling effect.
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