DIVIDEND POLICY

WHAT IS DIVIDEND POLICY?

 Dividend policy is the policy a company uses to
structure its dividend payout to shareholders.

 Some researchers suggest that dividend policy

may be irrelevant, in theory, because
investors can sell a portion of their shares or
portfolio if they need funds.

 This is the "dividend irrelevance theory," and it

infers that dividend payouts have minimal
impact on stock price.
DIVIDEND IRRELEVANCE THEORY

 The dividend irrelevance theory is the theory

that investors do not need to concern themselves
with a company's dividend policy since they have
the option to sell a portion of their portfolio
of equities if they want cash.
 The dividend irrelevance theory indicates that a
company’s declaration and payment of dividends
should have little to no impact on stock price.

 If this theory holds true, it would mean that

dividends do not add value to a company’s stock
price.
 Yet studies show that stocks that do pay a
dividend often increase in price by the amount of
the dividend as the book closure date approaches.

 Although the dividend may not actually be paid

until a few days after this date, given the
logistics of processing such a large number of
payments, the price of the stock usually drops
again the amount of the dividend.

 Buyers after this date are no longer entitled to

the dividend. These practical examples can
conflict with the dividend irrelevance theory.
STABLE DIVIDEND POLICY

 easiest and most commonly used

 The goal of the policy is steady and predictable

dividend payouts each year. Whether earnings
are up or down, investors receive a dividend.

 The goal is to align the dividend policy with the

long-term growth of the company rather than
with quarterly earnings volatility.

 This approach gives the shareholder more

certainty concerning the amount and timing of
the dividend.
CONSTANT DIVIDEND POLICY
 Under the constant dividend policy, a company
pays a percentage of its earnings as dividends
every year.

 If earnings are up, investors get a

larger dividend; if earnings are down, investors
may not receive a dividend.

 The primary drawback to the method is the

volatility of earnings and dividends.
RESIDUAL DIVIDEND POLICY

 With a residual dividend policy, the company

pays out what dividends remain after the
company has paid for capital expenditures and
working capital.

 This approach is volatile, but it makes the most

sense in terms of business operations. Investors
do not want to invest in a company that justifies
its increased debt with the need to pay dividends.
REAL WORLD EXAMPLE OF DIVIDEND POLICY
 Kinder Morgan (KMI) shocked the investment world
when in 2015 they cut their dividend payout by 75%, a
move that saw their share price tank. However, many
investors found the company on solid footing and
making sound financial decisions for their future. In
this case, a company cutting their dividend actually
worked in their favor, and six months after the cut,
Kinder Morgan saw its share price rise almost 25%.

 In early 2019, the company again raised its dividend

payout by 25%, a move which helped to reinvigorate
investor confidence in the energy company. As of May
5, 2019. KMI is trading at 150% of its 2015 lows, with a
dividend yield of 5.12%.