Dividends Policy and Common Stock Prices

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The issue of how much a company should pay its stockholders, as dividend is one that has been of concern to managers for a long time. The optimal dividend policy of a firm may be defined as the one that increases shareholders wealth by the greatest amount. It is therefore necessary, to understand the nature of the relationship between dividend and value of the firm. It is in the light of this that the study examines the possible effects of a firm’s dividend policy on the market price of its common stock with reference to the Nigerian context, using Nestle Nigeria Plc. as case study. In so doing, the methodology adopted include the use of ex post facto research techniques to acquire data and the use of co-relational research
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It is usually expressed as a percentage of face value of the company’s shares as stated in its articles of association or as a fixed amount per share.
The owners of a company stocks are entitled to dividends. The value of the share corresponds to the present value of the dividends that would be paid on the share. However, some equity investors prefer capital gains to dividends while some others are interested in the income (dividends). Shareholders’ don’t only get returns just from dividend payments but also from the additional gains resulting from any appreciation in the value of the share.
Whether or not (and the extent to which) dividends would be paid from the earnings of a public limited company depends on the dividend policy adopted by its management. In early corporate finance, dividend policy referred to a corporation’s choice of whether to pay its shareholders a cash dividend or to retain its earnings. The policy also addressed the frequency of such payments of dividends (whether annually, semiannually or quarterly) and how much the company should pay if it decides to do so. The optimum dividend policy of a firm depends on investor’s desire for capital gains as opposed to dividends, their willingness to forgo present dividends for future returns, and their perception of the risk associated with postponement of returns.
In today’s corporations, dividend policy has gone beyond paying cash to shareholders to

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