Increased common stock dividend sends signal to stockholders

Question

Elaborate: The increased common stock cash dividend can send a signal to the common stockholders.

Answer 1

A rise in cash dividends is mostly seen as a positive signal. A company will not be able to increase its dividend if it does not think that its future prospects are good enough to maintain the higher level of dividends. This is mainly because the market generally frowns upon a cut in dividends.