Dividends are ``declared'' when a company examines its earnings and decides how much to pay out as dividends. Regardless of whether dividends are called ``regular'' or ``special'', whether they are declared quarterly, semi-annually, or annually, in fact the sum paid is totally at the discretion of the management and directors of the corporation. This makes dividends much more attractive than interest payments to a management worried about hard times: you can stop paying dividends whenever you need to, but if you miss an interest payment on a bond, you're bankrupt.
Once a company has adopted a policy of regular dividend payments, however, the expectations of the market set limits on management's theoretically complete discretion to set dividends. If an investor has purchased stock in the expectation of receiving $500 a year in income and one fine day the company announces that it's cutting the dividend in half because it needs to retain the cash to build a new Airship Foundry, the investor is not going to be pleased. Suddenly his income has been halved, and the company is going to spend the money on something that may not return value to him for several years, if ever. His natural reaction is to sell the stock and do something else with the money. When many people do this at the same time, the price of the stock gets clobbered and it may take years to recover. Not only has the stock returned unreliable earnings, it has marked itself as prone to capricious changes in dividends, so investors are unlikely to pay as much for whatever income it provides as they'll pay for income from companies which have never suspended or cut their dividends (and there are companies whose record for increasing dividends extends over a century).
Thus, by paying dividends a company creates the expectation that the dividends will continue to flow. Management places itself on a dividend treadmill where failure to meet expectations will result in a sharp fall in the company's stock price. If future earnings cannot sustain the dividend and the company is forced to skip or reduce the payment, the stock will be triply hammered: first in reaction to the earnings themselves, then by disappointing investors who had expected the dividend payment, and finally by establishing a record for unreliable payment of dividends.
In the case of a New Technological Corporation, at least as long as it is grouped with ``high-tech'' companies, it is not clear that the additional risk to the stock price from missing a dividend is a serious problem. High technology companies merit very high price/earnings ratios based on expectations of rapid and reliable quarterly growth in sales and earnings. The penalties exacted in stock devaluation when a high technology company ``disappoints the market'' by earning less than the analysts expected are so large that the additional consequences of reducing or eliminating a dividend may not be significant.
The operating margins of a New Technological Corporation are so high that it can sustain a major drop in sales and still generate enough earnings to meet a dividend payment, simply by choosing to pay a larger percentage of earnings as dividends during the sales slump (since the company has no obvious way to reinvest retained earnings, why not meet the dividend?). Also, since a New Technological Corporation is not capital-intensive, the exigencies of its business are unlikely to require retaining earnings for capital spending projects as often happens in high-technology businesses (for example, a semiconductor manufacturer may need to construct an expensive new fabrication plant to remain competitive in its central market). In fact, a reliable dividend payment which results in rising yield as the company's stock declines due to disappointing sales or earnings, or simply because the overall market is declining, can act to moderate stock price swings, as investors who might otherwise sell choose to hold the stock, collect the dividends, and wait for better times. Further, as the stock declines it becomes more attractive to income-oriented investors whose purchases act to stem price erosion resulting from sales by those investing for capital gains.
Editor: John Walker