3 Types Of Dividend Policy All Successful Dividend Investors Must Know!
Last Updated on 1 week ago by Antony C.
Successful dividend investors learn about dividend policy before investing. Knowing this fundamentals of dividend investing is what some dividend investors have a much higher returns than others, having better ability to find good dividend stocks.
As a smart dividend investor like yourself, you will need to learn about the different dividend policies used by companies.
3 Types Of Dividend Policy
A dividend policy is a company’s policy regarding the payment of dividends to its shareholders. There are many types of dividend policy, but there are 3 types of dividend policy that are most common and it is what all dividend investors need to know before they start dividend investing.
The 3 types of dividend policy are:
- Stable Dividend Policy
- Constant Dividend Policy
- Residual Dividend Policy
Generally, a dividend is a distribution of profits by a corporation to its shareholders and depending on its dividend policy, the dividends can be issued as cash payments, shares of stock, or other property.
1. Stable Dividend Policy
A stable Dividend Policy is the most common. The goal is to ensure steady and predictable dividend payouts each year.
Stability is something that most dividend investor wants. Because of that, it is one of the most popular amounts for all dividend investors.
Generally, the dividend policy is aligned with the long-term growth of the company. Most blue chip stocks which are already been in the market for a long period of time are in this category.
A stable Dividend Policy gives the shareholder more certainty on the amount of the dividend and when the dividend will be paid.
Stable Dividend Policy
- Dividend Stability: 5/5
- Dividend Growth: 1/5
- Business Sustainability: 2/5
- My Rating: 2/5
2. Constant Dividend Policy
The 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.
Constant Dividend Policy
- Dividend Stability: 3/5
- Dividend Growth: 3/5
- Business Sustainability: 3/5
- My Rating: 3/5
3. Residual Dividend Policy
A Residual Dividend Policy is commonly used by many companies that focus on growth. For these companies, the dividend is not the main focus of the company’s policy. Nonetheless, these companies still pay 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.
Residual Dividend Policy
- Dividend Stability: 1/5
- Dividend Growth: 2/5
- Business Sustainability: 5/5
- My Rating: 5/5
Which Dividend Paying Policy Is Better?
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:
- A stable Dividend Policy might be suitable for those who are looking for a stable income from their dividend stocks.
- A constant Dividend Policy might be suitable for those who think of them as part of the company and receive their dividend according to the company’s growth
- A residual Dividend Policy might be suitable for those who know the business of the company in which they are investing and is leaning towards more 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.
“Investing in your own circle of competence”
Warren Buffett, the legendary value investor
Companies with a residual Dividend Policy allow 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.
Dividend investing is especially great for young investors who want to build a passive income since this group of investors will benefit from the years of dividends given out by the company.
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Antony C. is a Singaporean dividend investor focused on building passive income through REITs, ETFs, and Dividend Stocks. With 15+ years of experience investing in Singapore, Hong Kong, and China markets, he founded IncomeBuddies.com to share practical wealth-building strategies tested in his own portfolio since 2008. His expertise has been featured in Yahoo Finance, Nasdaq, and NFAA, and he’s the published book author of "Start Small, Dream Big".