Financial Management: Core Concepts, Third Edition

17.2 Dividend Policy

The declaration and payment of dividends are important events for a company, but is the size of the dividend important? That’s the question we really want to answer. A company can pay a large dividend, or it can pay a small one, or none at all, and invest more in the business. Dividend policy deals with whether the firm should pay out a large amount now or invest more in the company. It is actually just a matter of timing of the dividends.

The declaration of an actual cash dividend is the culmination of a company’s dividend policy. So why do some firms pay large cash dividends and others pay small cash dividends or none at all? Is there an optimal dividend policy? Does it matter what dividend policy a company chooses? We ...