Question

What are the characteristics of dividend payments that give them the potential to act as signals of quality?

Answer 1

A dividend is the distribution of a portion of the company's earnings, decided and managed by the company’s board of directors, and paid to a class of its shareholders. Common shareholders of dividend-paying companies are typically eligible as long as they own the stock by the ex-dividend date. Dividends may be paid out as cash or in the form of additional stock. Dividends are payments made by publicly-listed companies as a reward to investors for putting their money into the venture.

Characteristics of dividend payments that give them the potential to act as signals of quality are:

1. A dividend is a token reward paid to the shareholders for their investment in a company’s equity, and it usually originates from the company's net profits. Higher Dividend would indicate higher profits and shows that the company is becoming more and more profitable.

1. Announcements of dividend payouts are generally accompanied by a proportional increase or decrease in a company's stock price. If the dividend amount keeps on increasing every year, potential investors get attracted to the company, and demand for the company’s stock increases which ultimately leads to an increase in a company's stock price and vice versa.

1. An appropriate amount of earnings should be maintained keeping in mind the future fund requirements of the company and therefore dividend payment should be made accordingly.