The basis of dividend payouts
When we treat dividend policy as strictly a financing decision, the payment of cash dividends is a passive residual. The percentage of earnings paid out as dividends will fluctuate from period to period in keeping with fluctuations in the amount of acceptable investment opportunities available to the firm.
If these opportunities are abound, the percentage of earnings paid out is likely going to be zero. On the other hand of the spectrum, if the firm is unable to find profitable investment opportunities, dividends paid out will be 100 percent of total earnings. For situation falling between the two ends of this spectrum the dividend payout ratio will be a fraction between zero and one.
Part of the reputation of many blue chip companies is that investors know they will reliably pay out a certain % of dividends every year. Stock prices would probably drop for these companies if they decided to reinvest earnings as opposed to paying it out in dividends, even if it was for a good reason, and that’s no good for the directors holding millions in stock!