Dividend Consistency: Rewards, Learning, and Expectations

The fact that many companies have a long track record of consistent dividend increases suggests that managers believe there is some benefit to establishing and maintaining such a pattern. Many companies, for example, follow a perennial policy of increasing the dividend in a particular quarter, maintaining it at the same level for the next three quarters, and then increasing it in the same quarter of the following year. But does the capital market reward companies for maintaining a consistent dividend policy? Do companies with a history of repeated dividend increases earn long-term positive abnormal returns; and if so, how long do the returns persist?

The authors find that companies earned significantly positive abnormal returns following each of the first five annual dividend increases, over and above the positive announcement-month returns. Nevertheless, the reward decreases as the track record of dividend increases becomes longer. After the first dividend increase, companies enjoy significantly positive returns for the next two years. Companies that increase the dividend in the same quarter of the following year also enjoy significant positive returns, but returns that are smaller (and less statistically significant) than in the case of first-time dividend increases. And as the dividend-increase track record further lengthens, the size and statistical significance of the abnormal returns continues to shrink; and after the sixth dividend increase, the abnormal returns in the next twelve months are statistically indistinguishable from zero.

In sum, although there is some support for maintaining a consistent dividend policy, the market response diminishes over time, and investors do not earn abnormal returns by buying stocks whose annual dividend has already been increased six or more times.