Certified Financial Management Specialist Practice Exam

What is the primary drawback of a stable dividend policy during economic booms?

1. Dividends may not be declared

2. Investors may not see a dividend increase

3. Company profits will decline

4. Investors will lose interest

The correct answer is: Investors may not see a dividend increase

A stable dividend policy aims to provide consistent and predictable dividend payments to shareholders. During economic booms, companies often experience increased profits and cash flow, leading investors to expect dividend increases that reflect this growth. However, if a company maintains a stable dividend policy, it may choose not to increase dividends even when profits rise significantly. This lack of increase can lead to dissatisfaction among investors who anticipate higher payouts in line with the company’s enhanced profitability. Consequently, while the company upholds its policy of stability, the inability to meet investor expectations for increased dividends during prosperous times becomes a drawback. This situation can potentially weaken investor sentiment since they look for engagement and rewards that match the flourishing economic context. Thus, the essence of the drawback lies in the disparity between investors' expectations and the company's dividend policy during stronger economic conditions.