Dividend Policy?

Here are several assertions about typical corporate dividend policies. Which of them are true? Write out a corrected version of any false statements.

a. Most companies set a target dividend payout ratio.
b. They set each year鈥檚 dividend equal to the target payout ratio times that year鈥檚 earnings.
c. Managers and investors seem more concerned with dividend changes than dividend levels.
d. Managers often increase dividends temporarily when earnings are unexpectedly high for a year or two.

For each of the following four groups of companies, state whether you would expect them to distribute a relatively high or low proportion of current earnings and whether you would expect them to have a relatively high or low price-earnings ratio.

a. High-risk companies.
b. Companies that have recently experienced a temporary decline in profits.
c. Companies that expect to experience a decline in profits.
d. 鈥淕rowth鈥?companies with valuable future investment opportunities.

Companies might have a target payout ratio, but they don't give out dividends based on that ratio exactly. There's a signaling effect with dividends and any decrease in the dividend in taken as a really bad sign so companies try to avoid that by being slightly conservative. Increasing will drive up the price but decreasing drives down the price more than increasing because investors are looking for steady gains.

http://finance.wharton.upenn.edu/~tarant...

Higher risk companies would tend to give out less dividends because they don't want the risk of having to decrease them. Investors also tend to be more risk adverse and price that into the company's trading level.