CMA Study Group

The correct answer given to below question is : C.

In practice, dividends

A	are usually changed every year to reflect earnings changes.
B	are usually set as a fixed percentage of earnings.
C	usually exhibit greater stability than earnings.
D	fluctuate more widely than earnings.

 

Anyone please let me know how dividends exhibit greater stability than earnings?

Payment of dividends depends on many factors  and I think dividends are as volatile as earnings.I understand the word  stability as consistancy. I could be wrong.

Anil. 

Hi Anil,

In actual scenario, if the company is paying dividend yearly, the investors will perceived that such company is much more stable than the company who reported only earnings but not paying dividends.

Thanks

Very clear.

Thanks.

The same may not be true for new generation companies (growth companies) who prefer to plough back their entire earnings into the business and remain debt free during initial phase of high growth. They instead give bonus shares/rights share to attract investors having apetite for capital gain than regular income. Dividend payment a strategic decision therefore does not have any quick fix formula, it is done taking lots of factors in mind. Infact Microsoft (like other growth companies) did not pay dividend for several years untill 2004, decades after its incorporation. However for academic purposes we should believe the option C is correct.

I completely agree with you Kaushik.

Thanks for letting us have an alternative view on the subject. Such views make the topic more interesting.

Regards,

Anil.

Once the dividend payouts are declared it's rare that they are reduced. Usually it is the last thing a company does and it's a sign of bad financial position to reduce the dividend. Even as earnings fluctuate quarter to quarter, dividends usually remain the same.

You are right Brandon. Dividends are not only a payout to the investors but also a signal to the market to bolster long term investors' confidence in the company company. Abberations are there but those are rare. 

Long-term investors and shareholders tend to favor companies that pay a consistent dividend, so it's usually in the best interest of the company to pay out dividends, even when they experience a loss. Thus, in practice, dividends are usually more predictable and exhibit more stability than earnings.

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Andrew Jensen
Student
Tooele UT
United States
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Original Message:
Sent: 04-19-2011 11:47 AM
From: Anil Nijagal
Subject: NEW CMA Part 2 -Dividend more stable than earnings

The correct answer given to below question is : C.

In practice, dividends

A	are usually changed every year to reflect earnings changes.
B	are usually set as a fixed percentage of earnings.
C	usually exhibit greater stability than earnings.
D	fluctuate more widely than earnings.

 

Anyone please let me know how dividends exhibit greater stability than earnings?

Payment of dividends depends on many factors  and I think dividends are as volatile as earnings.I understand the word  stability as consistancy. I could be wrong.

Anil.