ACCA Advanced Financial Management (AFM) Practice Exam

In terms of dividend policy, what might a fixed dividend indicate?

1. Variable financial performance

2. Unchanging payment amounts

3. Increased future liabilities

4. Higher risk of dividend suspension

The correct answer is: Unchanging payment amounts

A fixed dividend typically indicates unchanging payment amounts. Companies that adopt a fixed dividend policy commit to paying a set amount per share at regular intervals, often reflecting a stable and predictable approach to returning value to shareholders. This is associated with companies that have a consistent cash flow and stable earnings, allowing them to confidently offer a fixed return. The choice of a fixed dividend suggests that the company aims to maintain investor confidence and potentially attract income-focused investors who prefer the reliability of consistent payments. This could also indicate a mature company with less volatility in earnings, reinforcing the notion of stability in its operations and financial performance. Unlike a variable dividend policy, which may fluctuate based on the company's financial results and cash availability, a fixed dividend represents a commitment to maintain a steady payment. This can be particularly appealing in uncertain market conditions where investors might seek predictable income sources.