Given below are two statements:
Assertion (A): Other things remaining the same, a company having stable earnings is in a better position to declare higher dividends.
Reason (R): Companies generally follow a policy of stabilising dividend per share.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both (A) and (R) are true but (R) is not the correct explanation of (A).
Assertion (A): Other things remaining the same, a company having stable earnings is in a better position to declare higher dividends. — True. This is the factor called stability of earnings. A company with unstable earnings is likely to pay a smaller dividend.
Reason (R): Companies generally follow a policy of stabilising dividend per share. — True. This is the factor called stability of dividends. Dividend per share is not changed when a change in earnings is small or seen to be temporary.
Why R does not explain A?
R is about the company’s policy of keeping the dividend per share steady. It says nothing about why steady earnings allow a higher dividend. A steady dividend can be kept at a low level too, so R does not lead to A.
The correct reason for A is that dividends are paid out of current and past earnings. When earnings are steady, the company can count on them, so it can safely declare a higher dividend.
NCERT (2026-27 Edition): “(a) Amount of Earnings: Dividends are paid out of current and past earning. Therefore, earnings is a major determinant of the decision about dividend.” “(b) Stability Earnings: Other things remaining the same, a company having stable earning is in a better position to declare higher dividends. As against this, a company having unstable earnings is likely to pay smaller dividend.” “(c) Stability of Dividends: Companies generally follow a policy of stabilising dividend per share. The increase in dividends is generally made when there is confidence that their earning potential has gone up and not just the earnings of the current year. In other words, dividend per share is not altered if the change in earnings is small or seen to be temporary in nature.” |