Question

What’s constant growth dividend policy? advantages? disadvantages? Any real-world example?

Answer 1

In a constant growth dividend policy the management declares dividend based upon a constant growth rate. For example the first year dividend was $1.00. The management decides upon a constant growth of 10%. Hence the dividend the next year will be $1.10.

The advantage of this policy is that it gives a sign of constant growth of the business and its profitability. It creates confidence in the investors. It provides growing returns to the investors who are dependent upon dividend income. It also creates high credibility and high credit standing in the market.

The major disadvantage of this policy is that it creates expectations in the minds of the investor’s. If the expectations are not met it will result in erosion of value of the company in the form of declining share prices.

Johnson & Johnson is one such example which follows a growing dividend policy. However there is no example which follows a strictly constant growth policy due to changing economic conditions.