Dividend policy
Dividend policy is a firm's strategy for deciding what proportion of earnings to distribute to shareholders as dividends versus retain for reinvestment, with implications for signalling, firm value and financing flexibility.
FrameworkDividend policy
See it move
Paying a dividend returns cash to shareholders now and signals confidence in current earnings, but it leaves less available to reinvest. Retaining that same euro instead funds positive-NPV projects and avoids raising new external finance, though a later cut in payout is still read by the market as bad news. Most firms settle on a stable dividend, a constant payout ratio, or a residual policy.
Check yourself
According to Modigliani and Miller's dividend irrelevance proposition, shareholders are indifferent between receiving dividends and having earnings retained in the business. What is the core reason for this conclusion?