An increase in a firm's payout ratio increases current dividends received by a stockholder at the expense of lower future dividends.

Question

Quizplus · Accepted Answer

Increasing the payout ratio means that more of the firm's earnings are being distributed as dividends. This leads to higher current dividends received by stockholders, but it also means that the firm is retaining less earnings to fund future growth and pay future dividends. Therefore, lower future dividends can be expected.

An Increase in a Firm's Payout Ratio Increases Current Dividends