Dividend smoothing

Definition

Dividend smoothing is a strategy where companies aim to maintain a steady and predictable dividend payout over time, regardless of fluctuations in earnings or cash flow. This approach helps in reducing uncertainty for investors and signals financial stability.

5 Must Know Facts For Your Next Test

1. Dividend smoothing can help build investor confidence by providing consistent returns.
2. Companies may use retained earnings or reserves to maintain dividends during low-profit periods.
3. A stable dividend policy is often perceived as a sign of strong corporate governance.
4. Firms practicing dividend smoothing may avoid sudden increases in dividends even during high-profit periods to maintain consistency.
5. Dividend smoothing can affect a company's stock price positively by reducing perceived risk.

Review Questions

Related terms

Retained Earnings:

Profits that are kept in the company rather than paid out as dividends.

Payout Ratio: The percentage of earnings paid to shareholders in the form of dividends.

Stock Dividend: A payment made by a corporation to its shareholders in the form of additional shares rather than cash.