Corporate Finance

Dividend policy

1

Signaling theory suggests that dividend policy can be used to infer whether a company is set for growth or not. It claims that if a company grows its dividend, high levels of growth should be expected.

2

It suggests that the management of a firm are using dividends to try and communicate the future prospects of the firm to investors. The issue with this is that not all stocks offer a dividend.

3

Whether a company offers a dividend or not, usually depends upon the type of investor that they are hoping to attract. Dividend-paying stocks tend to be more stable and want long term investors.

4

Dividend payments should not be confused with dividend yields. If a stock has a high dividend yield (say 10%), this can be a sign that a company is in distress and that many investors have sold their stock.

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