Lintner's Stylized Facts on Dividend Payouts

companies on dividend payments

John Lintner conducted a series of interviews with managers about their firm’s dividend policy. He developed four “stylized facts” which describe how dividends are determined.

Lintner’s Four Stylized Facts

  1. Firms have a long run dividend payout ratio.This ratio is that fraction of earning which the company intends to pay out as dividends. 2. Managers focus on dividend changes rather than absolute levels of dividends.Paying a $2 dividend is important if last year’s dividend was $1.  It is unimportant if last year’s dividend was $2.  

3. Dividend changes respond to long-run sustainable changes in earnings, but not to short-run changes.Managers are unlikely to change dividends in response to temporary variations in earnings. Instead, they “smooth” dividends. 4. Managers are reluctant to make dividend changes which might have to be reversed.They are particularly worried about having to reverse a dividend increase.

Lintner’s Four Stylized Facts

The Lintner Model

Mangers believed that shareholders prefer a steady progression Investors see dividend decrease an unfavorable from mgmt abt firms future earning ability In sum, they worry that, assets, won't generate enough CF to support the dividend. 

The Lintner Model

Thus, in case of a circumstance in which dividends increase by large margins. The managers will wait to see if the earnings increase is permanent, before adjusting the dividend.

Seeking optimal Dividend Policy

Why Dividends May Increase the Value of the Firm The argument for paying higher dividends rests on their desirability to investors. For example: Some institutional investors are not allowed to hold stock if it lacks an established dividend record. Some investors (trusts, endowment funds, retirees) rely on the dividends from their portfolio to provide them with income.