Dividend Clientele

Dividend clientele is the name for a group of a company’s stockholders who share a similar view about the company's dividend policy. Shareholders in a dividend clientele generally base their preferences for a particular dividend payout ratio on comparable income level, tax considerations, or age. For instance, older, retired investors, or those who want current investment income might buy the stock of firms with high dividend-payout records. On the other hand, younger shareholders, or those who are in their prime earnings and savings years, may wish a company to use free cash flow (FCF) to fund its growth rather than distribute dividends.

A dividend clientele’s shareholders have a common preference for how much a company will pay out in dividends. In general, members of a dividend clientele make investment decisions based on which companies’ dividend-distribution policies would be most beneficial to them, and are most aligned with their investment objectives. Sometimes dividend clientele will even go so far as to pressure a company into adopting certain dividend policies. For example, shareholders who depend upon a generous dividend yield for income might pressure the company to continually maintain, or increase, its dividend. Research has shown that the demands from a company’s dividend clientele can be significant and far reaching.

In fact, a change in policy that is not aligned with the views of a company's dividend clientele can precipitate what is referred to as the clientele effect. This theory hypothesizes that investors can have a direct impact on the price of a security when a change in dividend, tax, or another policy affects their investment objectives. In other words, individuals may buy or sell the security if a policy change either aligns, or no longer aligns, with the individual's objectives. There is a good deal of controversy about the veracity of the clientele effect. Some believe that it takes more factors than just the wishes of a company’s clientele to move a stock’s price greatly. The example below, however, argues a strong case for the clientele effect.

After the market close on September 25, 2001, Winn-Dixie Stores, Inc. — a supermarket chain in Jacksonville, Florida — announced that it would cut its annual dividend of $1.02. The firm's policy had been to declare three monthly dividend payments of 8.5 cents per share at the beginning of each quarter. This dividend policy had attracted a clientele of investors who valued the regular current income.

Under the new plan, the company would declare a quarterly dividend of 5 cents and eliminate the monthly dividends. (At that time, Winn-Dixie was one of the last remaining companies on the New York Stock Exchange (NYSE) to pay a monthly dividend.) Simultaneously, Winn-Dixie lowered its fiscal 2002 earnings estimate, indicating that first-quarter earnings would range between 15-to-18 cents per share, instead of the projected 24-to-30 cents per share. Following the news, Winn-Dixie shareholders saw the value of their shares plummet. During next-day trading, Winn-Dixie common stock fell $7.37 to $12.41 — representing a 37 percent decline on very heavy volume.

Winn-Dixie's chief financial officer (CFO) said that the new dividend policy would offer the company greater financial flexibility, as it was altering its strategy to emphasize capital appreciation instead of cash payments to stockholders. Clearly though, the stock’s large price decline sent the message that existing stockholders did not appreciate Winn-Dixie’s new emphasis.

As this story shows, large policy shifts can be disruptive for both the company’s long-term interests, as well as shareholders’ portfolios. Once a company establishes a dividend payout pattern and attracts a given clientele, it is generally best not to subject it to too much alteration. Although investors could always switch to firms that offered the payout profile they desired, such changes would entail brokerage fees and other costs. And quite possibly, a firm that caused its clientele to weather such inconveniences might be rewarded with a lower stock price for it efforts.