Dividend Policy

Hikaru Takei is the portfolio manager for the Reliant Dividend Focused Fund. Takei wants to add a firm to his portfolio that follows a stable dividend policy. Takei is considering investing in one of four companies: Kirk Beauty Supplies maintains a constant dividend payout of 25 to 30 percent. Chekov Energy makes a regular practice of paying special dividends during times of high oil prices. Kelley Medical Devices increases its dividend each year in accordance with the companys long run growth rate of 4 percent. Barrett Satellite Systems has maintained a dividend of $2.00 per share over the last 6 years. Which stock best meets Takeis criteria? A) Kirk Beauty Supplies. B) Kelley Medical Devices. C) Barrett Satellite Systems. D) Chekov Energy. The Skubin Candy Company is a highly profitable and rapidly growing maker of chocolates and other confections. Skubins management team is considering various dividend policies and is most concerned about the possibility of the dividend amount decreasing from one year to another and the negative reaction from investors that such a decrease may cause. Under which dividend policy would Skubins dividend be most likely to decline in a given year? A) Longer-term residual dividend. B) Residual dividend. C) Target payout ratio. D) Dividend stability.

B Although A and C are quite stable as well :slight_smile:

B for the first one… B for the second too? what is longer term residual dividend…i hate it when they make stuff up like that…or is it somewhere that I missed!

I forget part 2… that’s B

B & D

B & B

B & B

It’s B and B guys! Your answer: A was incorrect. The correct answer was B) Kelley Medical Devices. Due to inflation considerations, a company with a stable dividend policy will have stability in the rate of increase for its dividend each year. This typically means aligning the companys dividend growth rate with its long-term growth rate. Although the company with the fixed per share dividend is a tempting choice, once inflation is considered, a fixed $2.00 per share dividend is actually declining each year in terms of spending power. Your answer: B was correct! Since Skubin Candy Corporation is a profitable, rapidly growing company, both a dividend stability and target payout policy is likely to lead to consistent dividend increases. A residual dividend approach, however, could lead to a decrease in the dividend if the company has sufficient positive NPV investment opportunities, thus leaving fewer dollars available for dividend payments. Mumu - Longer-term residual dividend is not a madeup term, it’s one of the Dividend Policys that factors into the the long term Optimal Cap structure to avoid the dividend volatility as observed in residual dividnd policy.


B & B


Q1. Why was B chose over option A “constant dividend payout of 25 to 30 percent.”??? Company needs a stable dividend policy, right? Also C looks reasonable

Earnings could be changing alot each year. So even though your payout ratio is constant, the dividends themselves aren’t.

^^ correct…so if you had high earnings one year and then a loss another year, even though you have a stable dividend payout…your actual dividends will get screwed… for C - Barrett maintained a dividend of 2.00 per year...that's a stable dividend..but 2 for 10 years will not be worth the same in the 10th year will it?? so you’re not actually paying a stable dividend…because the value of the $2 will decline over time

Good call for C. ^ Your increase in dividend payments has to at least keep up with inflation.

Don’t you sleep, Batman? I’ve seen your posting time which are often after midnight.

shh, I think he’s sleeping right now

Ha! Not for 30 more days. I am going to bed around 1am these days.

BOYS - I am not sleeping… I am at office and there are 14 prod issued today need to solve them before the trading day starts tomorrow.

mwvt9 Wrote: ------------------------------------------------------- > Ha! Not for 30 more days. I am going to bed > around 1am these days. AND WHAT WAKING UP AT 4?