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What are the advantages of having Stability of Dividends?
There are certain advantages of paying stable dividends over time. Some of these advantages are discussed below.
Resolution of the Uncertainty of Investors’ Income
Investors usually get to know about the performance of a company via the dividends they earn.
When a company pays stable dividends over the years, the investors understand that the company is doing good and there is no risk of staying invested in the firm.
When a company increases the number of dividends, it usually does so when it can maintain the increased level in the future. So, when increased dividends are paid, it conveys a positive message to the shareholders of the company.
When the earnings of a company drop but still continue to pay constant dividends, it conveys the message that the future of the company is bright. Therefore, the investors can stay assured that the company they’ve invested in will remain competitive in the future.
Investors’ Desire for Current Income
There are many investors who desire to use the income from dividends as wages or salaries. For example, retired employees, old men, and women may want to get regular dividend payments that act like wages for them. These investors prefer the stability of dividend payout and look for a stable, current income over the years.
Favor of Institutional Investors
Some institutions can invest in the share market to gain profit from mass investment and all corporate firms want these institutional investors to invest in their companies.
Institutional investors are very analytical in terms of the dividend payout policies of firms. They may not invest in companies that have an unimpressive dividend policy.
Therefore, to attract the investment of institutional investors, companies may resort to a stable dividend policy that acts as a record of dividend transactions of the company.
Raising Extra Finances
Stable dividend policies tend to create a favorable impression of the companies in the minds of investors. Therefore, when a company pays dividends regularly in stable amounts, the firms get a more helpful grip on the finances that can be sourced from external resources.
Apart from having the favor of bigger firms, stability in paying dividends also attracts smaller shareholders who intend to earn regular income from their investments. These are long-term shareholders who stay invested for a significant period of time, allowing the company to use the resources without having to raise funds every now and then.
Stability in the payout of dividends has its own merits that permit the companies to enjoy a superior status in the markets. It not only makes the companies more credible but also creates a group of loyal investors who stay invested in the company for longer tenures.
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