Stable dividend Payout ratio

According to this policy, the percentage of earnings paid out as dividends remain constant irrespective of the level of earnings. Thus, as earnings of a company fluctuates, dividends paid by it also fluctuates accordingly. The following figure shows the behaviour of dividends in case this policy is adopted–

Stable Dividends / Steadily changing dividends

According to this policy, dividends in rupee terms mostly remain constant irrespective of the level of earnings. Most of the times, it is gradually increased over a period. The following figure shows the profile of dividend payout according to this policy. Most of the business firms uses this policy.

Rationale for stability of dividend

Most of the firms follow stable dividends or gradually increasing dividends due to following reasons –

• Many investors consider dividends as a part of regular income to meet their expenses. Hence, they prefer a predictable pattern of dividends rather fluctuating pattern. A fall in the dividend income may lead to sale of some shares, on the other hand when the dividend income increases, an investor may invest some of the proceeds as reinvestment in shares. Both the cases involve transaction cost and inconvenience for investor. They, prefer regular dividends.
• The dividend policy of firms convey a lot to the investors. Increasing dividends mean better prospects of the company. On the contrary, decreasing dividends suggest bad earnings expectations. In addition, stable dividends are signs of stable earnings of the company. On the other hand, varying dividends lead to uncertainty in the mind of shareholders.
• Certain investors mainly institutional consider the stability of dividends as an important criteria before they decide on the investment in that particular firm.