Generally reinvest dividends since they are nominal. Holding stock is generally done for the price fluctuations...

Generally reinvest dividends since they are nominal. Holding stock is generally done for the price fluctuations rather than the dividends. However, dividends are a key measure for stocks. What do dividends tell investors? Is the amount important or the consistency of the dividends important?

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Expert Solution

Dividends are an important tool for signalling the future financial prospects of the company to investors. If a company in growth stage does not pay dividends, it signifies that the company has good investment opportunities and will be growing at above average growth rates in future. If a mature company pays dividends then it means that company is making profit and will continue to do so in near future. However, non-payment of dividends means either company's financial prospects are not good in near future or a company might be entering a new line of business and thus, increasing the uncertainty for investors.

More than the amount, it is the consistency of dividends that is more important because that signals to the investors the financial and operational well being of the company. Higher than average dividends can be used to increase the share price in short run or to retain the investors when the company management is uncertain about the business prospects of the company.

jeff jeffy answered 3 weeks ago

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