Successful dividend investors learn about dividend policy before investing. This difference makes them millions.
Normal dividend investor losses money, often because they fail to understand the fundamentals of dividend investing.
As a smart dividend investor like yourself, you will need to learn about the different dividend policy used by companies.
We shall now explore the characteristics of different types of dividend policy. The knowledge will allow you to identify what dividend policy is the company is using.
Without further ado, let’s equip you with one of the fundamentals of dividend investing!
Types of Dividend Policy
The 3 Types of Dividend Policy are:
- Stable Dividend Policy
- Constant Dividend Policy
- Residual Dividend Policy
1. Stable Dividend Policy
Dividend Stability: 5/5
Dividend Growth: 1/5
Business Sustainability: 2/5
My Rating: 2/5
Stable Dividend Policy is the most common. The goal is to ensure a steady and predictable dividend payouts each year.
Stability is something which most dividend investor wants. Because of that, it is one of the most popular amount all dividend investors.
Generally, the dividend policy is align with the long-term growth of the company. Most blue chip stocks which are already in the market for a long period of time are in this category.
Stable Dividend Policy gives gives the shareholder more certainty on the amount of dividend and when the dividend will be paid.
2. Constant Dividend Policy
Dividend Stability: 3/5
Dividend Growth: 3/5
Business Sustainability: 3/5
My Rating: 3/5
Constant Dividend Policy is the next most common policy. The company pays a percentage of its earnings as dividends every year.
There is just one big difference between a constant dividend policy to a stable dividend policy.
The amount of dividend payout for a constant dividend policy depends on how well is the company doing.
If the company is experiencing high growth, the dividend payout will be bigger each year.
The downside is that. It will be difficult to plan financially and rely on the dividend when dividend income is highly volatile.
3. Residual Dividend Policy
Dividend Stability: 1/5
Dividend Growth: 2/5
Business Sustainability: 5/5
My Rating: 5/5
Residual Dividend Policy is common used by many companies that focus on growth. For these companies, dividend is not the main focus of the company’s policy. Nonetheless, these companies do still pays a dividend.
Highly volatile in the dividend payout, the company only pay dividend after calculating what are the cash remaining after the company had paid for the expenses.
Although this policy makes the dividend received much more volatile, it makes the most sense in terms of business operation and sustainability of the business.
Investors like Warren Buffett will love to own dividends paying stocks like these.
The 3 Types of Dividend Policy each have different characteristics and are popular amount different dividend investors.
Different dividend policy is suited for different dividend investors:
- Stable Dividend Policy might be suitable for those who is looking for a stable income from their dividend stocks.
- Constant Dividend Policy might be suitable for those who thinks of them as part of the company and receive their dividend according to the company’s growth
- Residual Dividend Policy might be suitable for those who know the business of the company which they are investing, and is leaning towards more on business sustainability and seeing themselves as owners of the company.
I personally like companies with a Residual dividend policy, as I believe in knowing the business before buying their stocks.
Warren Buffett, the legendary value investor said:
“Investing in your own circle of competence”
Companies with a residual Dividend Policy allows better business sustainability and growth. With good management, the excess cash reinvested in the company can help to increase the value of the company and thus my return on investment.
Each investor have different risk appetite and investing style.
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