Corporate Dividend Practice

One consideration is the desire to have a relatively stable dividend; the second is the desire to pay out, in the long run, a given fraction of earnings. This fraction is usually referred to as the payout target. These objectives may be conflicting. Earnings tend to fluctuate substantially from year to year. If a corporation routinely paid out a given fraction of those earnings as dividends, then the dividend itself would tend to fluctuate drastically from year to year or quarter to quarter. These fluctuations would conflict with the objective of maintaining a stable dividend policy.