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Hi
I hope I am asking this question correctly so please bear with me
Which type of investor is suited to which type of dividend payout….eg if a company is in growth phase investor seeks to obtain a lower level of dividend
In June 2008 Limni Co, the examiner stated that for part b students were confused between stable dividends and stable dividend policies. What is the difference
Lastly what are some of the important aspects to look out for in a question like this alternatively in a dividend qn
Thank you.
Basically, companies that retain a lot of their earnings (and therefore pay a low dividend) will be growing (because they use the retained amount to expand the company). This will mean that dividends will grow and also that the market value of the shares will grow (there will be capital growth).
Companies that do not retain and therefore pay high dividends will not be growing.
So, for example, and old person is perhaps more likely to prefer the second case – they are likely to prefer high income and not be bothered about capital growth.
However, a young person earning a salary is maybe more likely to prefer the first case – they are less in need of the income and prefer capital growth.This is not obviously a rule, but the point is that people decide which company they want to invest in (depending on whether they prefer high income or high growth) and therefore will be unhappy if the company then changes its policy.
Stable dividends means that the growth (or lack of it) in dividends is reasonably constant. Stable dividend policy means that the company continues to distribute a reasonably constant proportion of their earnings.
For more, I think you would find it useful to read chapter 6 of the free Course Notes (on corporate dividend policy).
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