What are the dangers of having Stability of Dividends?

Finance ManagementBanking & FinanceGrowth & Empowerment

Although there are advantages of paying stable dividends over the years to the company’s shareholders, there are some dangers associated with the policy too. As is obvious, dividend payments play an important part in the smooth running of a business and the stability of dividends makes it more critical for the shareholders.

Sudden Break in Payouts

The stability of dividends creates an image of a company in the minds of the shareholders and this image keeps growing over time.

  • When a company suddenly stops paying stable and regular dividends, it creates a grave hollow situation in shareholders’ desire. This can impact their livelihood in a serious manner.

  • One of the biggest dangers, therefore, of the stability of dividends is a sudden break in payouts. Shareholders consider payouts as salaries and when the dividend payment is stopped abruptly, it acts as a cut in salary of the shareholders.

  • A sudden break in dividend payouts can disrupt the smooth-running system of finances of smaller investors, affecting their daily lives who depend on dividends as a regular income.

Maintaining the Dividend Payouts Even in Lean Years

Even when the process looks like a super attractor of investment in a company, the companies should be aware that starting stability of dividends is not enough.

  • The main objective should be to maintain the payouts even in the lean years when income is not up to expectation.

  • The companies must be ready to pay dividends when the earnings don’t match the expectation if they tend to follow the stability of the dividend model.

Interim Dividends

In order to avoid such dangers, companies should allow interim dividends rather than making stable dividends a norm. This will have a lesser negative effect on shareholders’ lives rather than when stable dividends are not paid after a promise.

  • Interim dividends are not regular payments. They can be paid periodically or when there is an extra income.

  • Interim dividends can be opted as an alternative to the stability of dividends to avoid the dangers of non-payment after declaring a stable dividend policy.

Conclusion

It is a matter of great concern for shareholders to get regular stable dividends for income and growth of wealth. That is why companies that pay a stable dividend are considered superior to firms that pay no stable dividends.

However, companies should be aware that opting for a stable dividends allowance policy should be made when the company can carry out payouts for the long foreseeable future. Just announcing stability in dividends is not enough and companies should better embrace an interim dividend policy instead of a stable one if they are not sure about income in the future.

raja
Updated on 31-Mar-2022 08:46:37

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