Dividend Clientele

What Is a Dividend Clientele?

Dividend clientele is the name for a group of a company's stockholders who share a comparable view about the company's dividend policy. Shareholders in a dividend clientele generally base their preferences for a specific dividend payout ratio on comparable income level, personal income tax considerations, or their age.

For instance, more established retired investors or the people who need current investment income could buy the stock of firms with high dividend-payout records. Then again, more youthful shareholders, or the people who are thriving earning and savings years, may wish a company to utilize free cash flow (FCF) to fund its growth, instead of convey dividends to its shareholders.

Grasping Dividend Clientele

A dividend clientele's shareholders have a common preference for how much a company will pay out in dividends. As a rule, individuals from a dividend clientele pursue investment choices based on companies that have dividend-circulation policies that are beneficial to them and are generally lined up with their investment objectives.

Now and then dividend clientele will even venture to such an extreme as to pressure a company into taking on certain dividend policies. For instance, shareholders who rely on a liberal dividend yield for income could pressure the company to keep up with continuity, or increase its dividend. Research has demonstrated the way that the requests from a company's dividend clientele can be huge and extensive.

Special Considerations

The Clientele Effect

As a matter of fact, a change in policy that isn't lined up with the perspectives on a company's dividend clientele can encourage what is alluded to as the clientele effect. This theory guesses that investors can straightforwardly affect the price of a security when a change in dividend, tax, or another policy influences their investment objectives.

All in all, people might buy or sell the security in the event that a policy change either adjusts or no longer lines up with the singular's objectives. There is a fair plan of contention about the veracity of the clientele effect. Some accept that it takes a bigger number of factors than just the desires of a company's clientele to enormously move a stock's price. The model below, notwithstanding, contends a strong case for the clientele effect.

Illustration of the Clientele Effect

After the market close on September 25, 2001, Winn-Dixie Stores, Inc. — a supermarket chain in Jacksonville, Florida — announced that it would cut its annual dividend of $1.02. The firm's policy had been to declare three month to month dividend payments of $0.085 pennies per share toward the beginning of each quarter. This dividend policy had drawn in a clientele of investors who valued the normal current income.

Under the new plan, the company would declare a quarterly dividend of $0.05 and kill the month to month dividends. Note that around then, Winn-Dixie was one of the last leftover companies on the New York Stock Exchange (NYSE) to pay a month to month dividend. The company has since gone through a merger with a privately held company and been delisted from the NYSE.

All the while, Winn-Dixie brought down its fiscal 2002 earnings estimate, demonstrating that first-quarter earnings would go between $0.15 to $0.18 per share, rather than the projected $0.24 to $0.30 per share. Following the news, Winn-Dixie shareholders saw the value of their shares dive. During next-day trading, Winn-Dixie common stock fell $7.37 to $12.41 — addressing a 37% decline on extremely heavy volume.

Winn-Dixie's chief financial officer (CFO) said that the new dividend policy would offer the company greater financial flexibility, as it was modifying its strategy to underline capital appreciation rather than cash payments to stockholders. Obviously, however, the stock's large price decline sent the message that existing stockholders didn't see the value in Winn-Dixie's new accentuation.

As this story shows, large policy movements can be disruptive for both the company's long-term interests, as well as shareholders' portfolios. When a company lays out a dividend payout pattern and draws in a given clientele, it is generally best not to subject it to too much alteration. In spite of the fact that investors could continuously switch to firms that offered the payout profile they wanted, such changes would involve brokerage fees and different costs. What's more, conceivably, a firm that made its clientele weather conditions such bothers may be compensated with a lower stock price for its efforts.

Highlights

• Dividend clientele is the name for a group of a company's stockholders who share a comparative view about the company's dividend policy.
• More seasoned retired investors or the individuals who need current investment income could buy the stock of firms with high dividend-payout records.
• Some of the time dividend clientele will even venture to such an extreme as to pressure a company into embracing certain dividend policies, for example, constraining the company to keep up with continuity or increase its dividend.