A Theory of Dividends - Dissertation Example

The main dividend policies practically adopted by most of the companies world wide can be basically divided into four categories. Constant dividend system tops the list followed by constant dividend ratio system, dividends equal to free cash flow system and sticky dividend system (Internet, Introduction to Dividend Policy & Theory, two issues, 1). In the constant dividend system, companies pay sum constant amount as dividend every year irrespective of the profit range while in the constant ratio system, they adopt a constant ratio on earnings.

  The latter is also known as the EPS or DPS meaning earnings per share or dividend per share. In the third system, quantum of free cash flow guides the payment. In the last one, also known as the Lintner Model, companies adopt a sticky method in which dividends are first paid in a low level and then increased after some years. This is mainly done to enhance the confidence of investors and shareholders. Dividend theoriesWhy should companies declare dividends? It is the responsibility of the managements to show some monetary benefit to the investors who have invested their savings.

Companies conduct their business with the investments offered by the shareholders and it is their bounden duty to offer dividends in return to them. But, as the shares of the companies are traded in the stock markets, it is natural for market players to link the dividends to the share prices. It is true that there are some companies that do not pay dividends.