Development of a Dividend Policy

Any company issuing stock will have to consider the dividend policy it will use to make payments to shareholders. When a company earns money, it can use profits to build corporate capital or pay the profits out in dividends. These two choices have very different immediate results, but some research shows the big picture is not largely affected by a corporate dividend policy.


The goal is to use profits to best grow the value of the company. However, it is hard to say whether the company is served best by enticing share holders with high dividends, thus leading to more valuable stock, or by investing directly in capital, growing the ultimate worth of the company. Every corporate business board of directors will ask this question at some point. 

Dividend Irrelevance Theory

Despite the many ways to answer the question of "what is the best dividend policy?," the real answer may be, "none." Research supports the idea that the ultimate worth of a company is largely the same whether it pours profits into capital or into dividends. Therefore, each board of directors can determine the policy it is most comfortable with and go forward from there. 

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