Handbook of Finance: Investment Management and Financial Management

Chapter 64. Dividend and Dividend Policies

FRANK J. FABOZZI, PhD, CFA, CPA

Professor in the Practice of Finance, Yale School of Management

PAMELA P. DRAKE, PhD, CFA

J. Gray Ferguson Professor of Finance and Department Head of Finance and Business Law, James Madison University

Abstract: Many corporations pay cash dividends to their shareholders and, despite the tax consequences of these dividends and the fact that these funds could otherwise be plowed back into the corporation for investment purposes, these dividends are often viewed as a signal of the corporation's future prosperity. Corporations may also "pay" stock dividends or split the stock, dividing the equity pie into smaller pieces, the announcement of which is often viewed as positive news by investors. Funds can be paid out to shareholders other than in the form of a cash dividend; corporation may repurchase their shares from shareholders through open market purchases, tender offers, or targeted block repurchases.

Keywords: dividends, dividend policy, dividends per share, dividend payout, dividend reinvestment plan, stock dividend, stock split, dividend irrelevance theory, "bird in the hand" theory, signaling, agency theory, stock repurchases, tender offer

DIVIDENDS

A dividend is the cash, stock, or any type of property a corporation distributes to its shareholders. The board of directors may declare a dividend at any time, but dividends are not a legal obligation of the corporation—it is the board's choice. Unlike interest on ...