Compare and contrast a sticky dividend policy with a residual dividend policy. Which policy is more widely used by large corporations? What advantages does that policy have over the other?

Indicate whether the statement is true or false.

Answer: In a residual dividend policy, a firm pays out dividends from whatever funds remain after all required distributions have been made. Thus, the shareholders receive the current "residue" of earnings. Because earnings fluctuate from year to year, it is difficult to estimate with a reasonable degree of certainty the level of cash flow or dividend payment from period to period with a residual dividend policy. This level of uncertainly is generally distasteful to investors. Alternatively, a sticky dividend policy is so named because once a dividend is declared, the firm makes every effort to continue to pay that level of dividend. A sticky dividend policy means that the firm is reasonably certain that it will be able to continue to pay that level of dividend into the foreseeable future. An increase in the dividend is thus a reliable signal to the market that the increased dividend will continue. The sticky dividend policy is preferred by investors and firms alike as a way to reduce uncertainly about dividend cash flows and as a technique to signal changes in expectations for future cash flows.