Certified Financial Management Specialist Practice Exam

What is an advantage of a hybrid dividend policy?

1. Offers no dividends at all

2. Provides consistency through fixed annual payments

3. Allows for flexibility in dividend payments

4. Ensures high dividends regardless of earnings

The correct answer is: Allows for flexibility in dividend payments

A hybrid dividend policy combines elements of both stable and residual dividend policies, which offers significant flexibility in how dividends are paid based on the company's financial situation and overall performance. This flexibility allows a company to adjust its dividend payouts in accordance with varying earnings and cash flow circumstances, as well as the company's capital investment needs. For instance, in strong financial years, a company may choose to pay higher dividends, reflecting its ability to generate excess cash, while in lean years or during economic downturns, it can reduce or even temporarily eliminate dividends without facing shareholder backlash due to its established flexible policy. This adaptability can help maintain investor confidence and align dividend policy with cash availability and strategic financing needs, making it a strategic advantage over more rigid dividend policies that may not accommodate changes in the company's financial circumstances effectively.