Question

Are dividend payouts generally inversely or directly related to firm’s growth rates? Does this suggest that a dividend policy may signal information about future growth rates for a firm? Explain

Answer 1

Answer) Dividend refers to the sum of money paid by an enterprise to its share in a regular or annual period of time. The dividend payout generally increases due to the higher profitability of the firm. This higher profitability translates in the form of larger cash flow towards the shareholders. Hence, the dividend payout is generally directly related to the firm`s growth rates.

However, we can always conclude that a higher dividend policy would definitely result in higher future growth for a firm. For instance, a company might stop engaging in the venture of new growth generating project. This might result in a fall in the future level of profit. But the amount of cash flow in the form of a dividend would definitely rise.

Hence, a larger dividend payout is a necessary condition for a firms' growth but not a sufficient condition. Instead of looking for a higher dividend payout, a stable dividend payout is an optimal indicator of the companies health.