When it comes to a company's dividend policy and the board of directors' annual approval for a dividend payout, what do we mean by the term "signaling" as it relates to the dividends being paid out in any given year?

Dividend signaling is a theory that suggests that a company announcement of an increase in dividend payouts is an indication of positive future prospects.

Managers with good investment potential are more likely to signal. While the concept of dividend signaling has been widely contested, the theory is still a concept used today by some investors.

Explanation :

dividend signaling is done by the company when it changes the amount of income.

Increases in a company's dividend payout generally forecast a positive future performance of the company's stock.

The dividend signaling theory suggests that companies that pay the highest dividends are, or should be, more profitable those paying smaller dividends.

Signaling can be described as the process by which the company's dividend policy and the board of directors' annual approval for a dividend payout.

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