What is the rationale of stable dividend policy ?

Most firms adopt a stable dividend policy. The rationale for a stable dividend policy is as follows: Stock holders like stable dividends - Many of them depend on dividend income. A dividend reduction may cause serious hardship to the stockholders. A stable dividend policy is desirous for many investors such as retired persons who take dividends as a source to meet current living expenses. A stable dividend policy would reduce investor uncertainty and reductions in uncertainty are generally associated with lower capital costs and higher stock prices, other things being equal. Institutional investors prefer to invest in companies having stable dividend records. Adoption of stable dividends is advantageous for a company interested in raising funds from external sources. Shareholders willingly invest in companies having stable dividends as they have more confidence in such companies.