Dividend Policy Overview

This set of flashcards covers key concepts related to dividend policy, including definitions, theories, and tax implications.

What are dividends?

Variable and non-obligatory payments made to shareholders from accumulated profits.

How often are dividends typically paid?

Usually twice a year, with some companies paying quarterly.

What is a Constant Dividend Amount policy?

The company pays out a fixed amount of its post-tax profit regardless of the earnings of the year.

What is the Ex-dividend Date?

Occurs two business days before the date of record; if you buy stock on or after this date, you will not receive the dividend.

What does the traditional view on dividends state?

Dividends do affect share value; $1 of dividends is considered more valuable than $1 of retained earnings.

What do Modigliani and Miller's Dividend Irrelevance Theory state?

Dividend policy is irrelevant to share value under perfect market conditions.

What are homemade dividends?

Dividends that investors create on their own by selling shares, which are not costless.

What is the clientele effect?

A preference by certain investors for high dividends or growth affecting a company's dividend policy.

How are dividends taxed compared to share appreciation?

Dividends are taxed as income, while share appreciation is taxed as a capital gain.

What is meant by 'smoothing' dividend flows?

Not paying out as much as possible in good years to maintain reserves for bad years.

What is a stock dividend?

A dividend payment made in additional shares rather than cash, representing a recapitalization of earnings.

What does a stock split aim to achieve?

To decrease the share price to a more desirable trading range, maintaining shareholders' wealth.

What is a share repurchase?

When a company buys back its own shares, reducing the number of outstanding shares and often increasing the stock price.

What are Dividend Reinvestment Plans (DRIPs)?

Plans where shareholders use cash dividend proceeds to buy more shares instead of receiving cash.