Question

Provide in detail a description of the four stages of dividends policy, discussing the life cycle growth. Provide examples.

Answer 1

A company has broadly four stages of life, early stage, growth stage, maturity stage and decline stage. The dividend policy of the company is very closely resemblance of the stage in which the company is operating. The four stages of dividend policy are:

Stage 1: No dividends

At this stage the company is just starting its business and trying to raise capital by issuing stocks and there is no dividend paid at this stage. The company is more focused on raising funds and reinvesting them.

Stage 2: Low dividend

This is the growth stage of the company in which the company is focused on reinvesting a major part of its earning so its dividend payout ratio is small and retention ratio is high.

Stage 3: Increase in dividends

This is stage where the company is transitioning from a growth phase to maturity phase in its life cycle and a significant portion of its earning is paid as dividend. An important thing to note here is that even though the company is not paying dividend but if the company is growing then the investors will have capital gain.

Stage 4: Decline

At this stage the company starts to lose its market share to new entrants in the market and this is referred to as the decline phase in the life cycle of the company. Here the company does not increase dividend significantly but follows a dividend policy where the either the dividend is growing at small rate or there is buyback of shares.