## Dividend Payout Policies
There are two commonly examined payout policies. The trap is that their names sound similar but the mechanics are opposite — one fixes the amount, the other fixes the ratio.
### 1. Constant Dividend Policy (fixed amount)
- Pays a fixed dividend amount regardless of actual earnings.
- The amount may rise or fall over time but generally stays stable for a long period.
- Requires a Dividend Equalization Reserve Fund so dividends can still be paid even in low-profit years.
- Effectively treats common shareholders like preference shareholders — predictable income.
- Preferred by investors who depend on dividend income (e.g., retirees, institutions).
- Aims for long-term stability even though short-term earnings fluctuate.
### 2. Stable Dividend Policy (fixed percentage of earnings)
- Dividend = a fixed payout ratio (percentage) of net earnings each year.
- Example (Infosys, 2011): followed a 30% payout ratio on Consolidated PAT.
- No dividend is paid in case of losses.
- Retained earnings adjust automatically as earnings rise or fall.
- A conservative approach that prevents both overpayment and underpayment.
- Used by companies that base dividends on long-term sustainable earnings and raise them when earnings grow consistently.
Warren Buffett's view: either pay large dividends or none — companies should pay dividends only if reinvestment is not profitable.
### The crucial difference
| Constant Dividend Policy | Stable Dividend Policy | |
|---|---|---|
| What is fixed | The ₹ amount | The % ratio of earnings |
| In a loss year | Still paid (from reserve fund) | Nil |
| Reserve needed | Dividend Equalization Reserve | Not required |