Define the following terms: regular cash dividend, stock dividend, special dividend, and liquidating dividend. An increase in which of these dividends appears to send the most positive signal to the market? Why?

Question

What will be an ideal response?

Answer 1

Answer: A regular cash dividend is a payment of cash to the stockholders of a corporation. Depending on the firm's dividend policy, these tend to be the most frequent and consistent cash flows received by shareholders. An increase in the regular cash dividend is interpreted as an ongoing increase in the cash flows a stockholder can expect to receive from the corporation. A stock dividend is the payment of additional shares of stock to existing shareholders. A stock dividend is just a paper dividend and has no apparent economic value, although it could be construed by some investors as a positive signal for the firm's future. A special dividend is a one-time event and is not intended by management to be a signal of continued higher payouts to stockholders. Rather, by its designation as something special it is generally interpreted by the market as a one-time increase in dividends. A liquidating dividend is issued when the firm is discontinuing operations or when a major portion of the business has been sold off. These are considered final distributions and as such the market anticipates that the firm will cease to operate.
From these descriptions, it should be clear that an increase in the regular cash dividend should have the greatest impact on stock prices as it is the only form of dividend that represents a permanent increase in cash flows to shareholders, as opposed to one-time increases or paper changes.