For example, as of time of writing, Microsoft pays a dividend of $2.04 per share per year.
Why would Microsoft (and every company I've looked at) pay a fixed dividend instead of one indexed to their performance? Instead of $2.04 per share per year, Microsoft could say "I'll pay 70% of my operating cash flow as dividends". This means:
- If they go through a bad period, they would be able to pay less dividends without an actual dividend cut (and without going into debt to pay the dividend).
- They can issue shares without actually increasing their dividend payout.
- Sure, if they go through a good period they would have to pay more, but they'd also retain a larger amount to reinvest in their business (e.g. if their cash flow came in at $5 million compared to $4 million in guidance, they retain $1.5 million which is still larger than the expected $1.2 million). If they really don't need the extra cash, they could even have a special dividend of $0.3 million.
- If there is a big opportunity that they want to reach for, they have a bigger war chest available - they can use 100% of their cash flow instead of 100% less however much the dividend costs.
Related: Why do companies use debt to finance business deals instead of cut the dividend? If Altria had a fluid dividend, they could say "sorry guys but my operating cash flow this year is negative, so I can't pay a dividend ... but my cash flows less this debt repayment are very positive, and once I pay off this debt, I'll pay a dividend again."