What is meant by the Informational Content of Dividends?

Informational Content of Dividends

Dividend payout by competitive companies usually comes with statements of profitability and future growth. A successful firm uses the information to woo its current and potential investors by using promotional content about the profitability of the shares issued by the company. Thus, there is often a statement or content that is used along with dividend payouts. This is known as the informational content of dividends.

Informational Content is Useful for Investors

It is a fact that any statement made by a profitable firm becomes stronger if it adds some dividend or cash payout to its shareholders with the informational content.

Payout of dividends signals that the company is in a healthy state and it is working in the right manner. That is why informational content is useful. It offers a view of a firm and lets the investors know whether it is working efficiently.

• The MM model approves the use of informational content that favors the firm to advertise its achievements in the share market. When a firm’s share-value increases in the market, it is a matter of rejoicing for current and potential investors of the firm. This growth in the value of shares can be communicated in the form of informational content.

• The MM model stresses that the value of a share increases with the expected earnings in the future and not by the dividends. Therefore, companies may use the signals of future growth in share value as the promotion of the company’s dividend payout policy.

• A strong company usually pays increasing dividends over the continuous payment cycles to support the informational and promotional content it uses to strengthen its share value in the market.

• The MM model asserts that the informational content is merely a reflection of a firm’s investment policy and they do not have any significance in their own accord. However, since the informational content is of key importance for the investors to justify a company’s performance, they serve as a milestone of success for the firms that pay dividends to their existing shareholders increasingly.

Conclusion

It’s a matter of fact that the investors may be interested to know how the incomes are divided between retained earnings and dividends. While the tax differentials and floatation costs favor retained earnings, the transaction and agency costs, information asymmetry, and want for a current income favor the requirement of payment of dividends.

It is a matter of choice for the investors whether they seek the information provided by the firms to make their decision about the firm’s dividend policy. Usually, the firms that pay dividends regularly in an increasing manner are appreciated by investors. These companies are the ones that are rich in providing informational content, too.