Dividend Policy

A company’s dividend policy is a tool used by company management to set stakeholder expectations around dividends. Some companies like to keep their dividends at a similar level and, within limits, immune to quarterly or annual fluctuations in profits, so even in a profit down year, they might still maintain the dividend stable by dipping into retained earnings. Others might set a fixed percentage of profits to pay out as annual dividends. This method exposes shareholders to the vagaries of the profit cycle.