What are the benefits of a consistent dividend policy for your company?

1 What is a consistent dividend policy?

A consistent dividend policy is one that maintains a regular and stable dividend payout ratio over time. The dividend payout ratio is the percentage of earnings that a company distributes as dividends to its shareholders. A consistent dividend policy means that the company does not change its dividend payout ratio significantly in response to changes in earnings, market conditions, or investment opportunities. Instead, the company aims to pay a steady or gradually increasing dividend per share that reflects its long-term growth and profitability.

3 What are the challenges of a consistent dividend policy?

A consistent dividend policy is not without challenges. One challenge is that the company may face external or internal factors that affect its earnings and cash flow, and make it difficult to maintain its dividend payout ratio. For example, the company may experience a recession, a competitive threat, a regulatory change, or a major investment opportunity that reduces its profitability or increases its capital requirements. In these situations, the company may have to cut or suspend its dividend payments, which can disappoint and alienate its shareholders, and damage its market image. Another challenge is that the company may miss out on some growth opportunities or risk overpaying dividends, if it sticks to its dividend payout ratio regardless of its earnings and cash flow fluctuations. For example, the company may have excess cash that could be reinvested in more profitable projects or used to reduce its debt, but instead it pays out dividends that exceed its optimal level. In these situations, the company may reduce its shareholder value and competitiveness.

4 How to implement a consistent dividend policy?

To implement a consistent dividend policy, the company needs to follow some best practices. One best practice is to set a target dividend payout ratio that reflects the company's long-term growth rate, earnings stability, cash flow generation, and investment opportunities. The target payout ratio should be realistic, sustainable, and aligned with the company's strategic goals and financial situation. Another best practice is to communicate the dividend policy clearly and transparently to the shareholders and the market, and explain the rationale and expectations behind it. The company should also provide regular updates on its earnings and cash flow performance, and indicate any potential changes or adjustments to the dividend policy. A third best practice is to use a dividend smoothing technique that allows the company to adjust its dividend payments gradually and moderately over time, rather than abruptly and drastically. For example, the company can use a dividend growth model that increases the dividend per share by a constant or variable percentage each year, or a residual dividend model that pays out the dividends after meeting the capital budgeting needs.

5 What are some examples of a consistent dividend policy?

Examples of companies with a consistent dividend policy include Coca-Cola, Johnson & Johnson, and Microsoft. Coca-Cola has paid quarterly dividends since 1920 and increased its dividend per share for 59 consecutive years, with a dividend payout ratio of around 75%. Johnson & Johnson has paid quarterly dividends since 1944 and increased its dividend per share for 58 consecutive years, with a dividend payout ratio of around 50%. Microsoft has paid quarterly dividends since 2003 and increased its dividend per share for 17 consecutive years, with a dividend payout ratio of around 35%. These companies have demonstrated their capacity to produce consistent and growing earnings and cash flow while investing in their growth and innovation, as well as paying stable and increasing dividends to their shareholders.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?