Strict or Conservative dividend Policy which envisages the retention
of profits on the cost of dividend pay-out. It helps in
strengthening the financial position of the company; (2) Lenient
Dividend Policy which views the payment of dividend at the maximum
rate possible taking in view the current earing of the company.
Under such policy company retains the minimum possible earnings; (3)
Stable Dividend Policy suggests a mid-way of the above two views.
Under this policy, stable or almost stable rate of dividend
is maintained. Company maintains reserves in the years of
prosperity and uses them in paying dividend in lean year. If company
follows stable dividend policy, the market price of tis shares shall
be higher. There are reasons why investors prefer stable dividend
policy. Main reasons are:-
Confidence Among Shareholders. A
regular and stable dividend payment may serve to resolve uncertainty
in the minds of shareholders. The company resorts not to cut the
dividend rate even if its profits are lower. It maintains the rate
of dividends by appropriating the funds from its reserves. Stable
dividend presents a bright future of the company and thus gains the
confidence of the shareholders an the goodwill of the company
increases in the eyes of the general investors.
Income Conscious Investors. The
second factor favoring stable dividend policy is that some investors
are income conscious and favor a stable rate of dividend. They too,
never favour an unstable rte of dividend. A Stable dividend policy
may also satisfy such investors.
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. The value of shares of a
company having a stable dividend policy fluctuates not widely even if
the earnings of the company turn down. Thus, this policy buffer the
market price of the stock.
Encouragement to Institutional Investors. A
stable dividend policy attracts investments from institutional
investors such institutional investors generally prepare a list of
securities, mainly incorporating the securities of the companies
having stable dividend policy in which they invest their surpluses or
their long term funds such as pensions or provident funds etc.
In this way, stability and regularity of dividends not only
affects the market price of shares but also increases the general
credit of the company that pays the company in the long run.