Signals from Dividend Policies
- Commonly announcement of cash dividend payment increases are viewed by the investing community as a positive development and that management believes earnings will increase in the future.
- Alternatively, some investors may interpret a dividend increase announcement as a sign that a firm cannot find attractive investment opportunities. This interpretation may be relevant when a firm’s industry is transitioning from a growth to a mature stage.
- Alternatively, when a company announces that it is cutting its dividend payments, this is viewed by investors as a negative.
- Example: As the financial crisis of 2008 began to take shape, publicly traded U.S. banks began to announce dividend payment reductions in anticipation of mounting losses on their real estate loan portfolios.
- The reactions to dividend changes above largely reflect U.S. investor sentiment and investing cultures in other countries may react differently to announced increases or cuts to dividend payments.