Certified Financial Management Specialist Practice Exam

Which type of dividend policy is designed to provide steady dividends to shareholders?

1. Stable dividend policy

2. Residual dividend policy

3. Constant dividend policy

4. Variable dividend policy

The correct answer is: Stable dividend policy

A stable dividend policy is designed to provide a consistent and predictable flow of dividends to shareholders. This approach focuses on maintaining a steady rate of dividend payments, regardless of the company's short-term earnings fluctuations. By adhering to this policy, companies aim to create a sense of reliability and stability for investors, which can enhance investor confidence and potentially lead to a more favorable perception of the company's financial health. This policy contrasts with other types of dividend policies. For instance, a residual dividend policy ties dividends directly to the company's earnings and investment opportunities, resulting in dividends that may vary significantly from one period to another. Similarly, a constant dividend policy would aim for a fixed dividend amount per share over time, while a variable dividend policy would fluctuate based on the company's earnings and cash flow, making it less predictable for shareholders. Therefore, the stable dividend policy is specifically tailored to ensure a steady and reliable income for shareholders, distinguishing it from the other approaches.