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What are the three forms of Stability of Dividend?
It has been observed that most shareholders prefer the stability of dividend payouts. The firms may choose to pay dividends in regular intervals to satisfy the needs of the shareholders. Although the amount of dividend paid may change a little from year to year, payouts made every year is usually considered a wise policy.
There are three forms of stability of dividends −
Constant Dividend Per Share
Constant Dividend Per Share Plus Extra dividend
Now, let's analyze each of these forms in detail.
Constant Dividend Per Share
In some countries, companies prefer to pay dividends which are a portion of the paid-up capital. It is usually measured in percentage terms of the paid-up capital. In such a case, the companies pay equal dividends every year irrespective of the difference in income generated by the company.
The constant dividend payout has its own fallacies. For example, the companies may find it tough to manage to pay dividends when the earnings are low. Therefore, they keep a reserve of cash to be paid when the earnings are low or when the net income does not match the dividend payout ratio.
Instead of paying a fixed amount of dividend to shareholders, some companies pay dividends that are a constant proportion of the net earnings. In such a situation, the payouts are dependent on the net income of the company. So, the dividends paid fluctuate with the net earnings of the company.
Usually, companies pre-announce the percentage terms they will pay out as dividends to the shareholders. So, shareholders know how much to expect as dividends from the net earnings of a company. In such circumstances, the retained earnings accumulate automatically and the company does not have to keep an eye on the retained earnings that gather after paying out the constant amount of dividends.
Constant Dividend Per Share Plus Extra Dividend
To make things simpler, some organizations may pay extra dividends along with a constant dividend payout. This extra dividend is paid when the net earnings of a company is higher than usual and the company does not have to feel any stress for paying the extra dividend. In such a case of dividend payout, the dividends paid fluctuate from time to time according to the net earnings of a company.
The shareholders of companies that pay constant dividends plus extra dividends do know that the company is doing well when an increasing amount of dividends is paid. However, the companies that follow such kind of stability of dividend payment do not need to pay large amounts of extra premium to their shareholders every year.
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