The Interests of Shareholders

• Liquidity represents an important consideration for inactive shareholders in a company. In contrast, many of the more active shareholders of a company have more varied interests. Active shareholders tend to prefer reinvestment of dividends into the company to support future growth. On the other hand, inactive shareholders generally prefer companies to distribute funds as dividends to investors. The board of directors typically decides about how the company will account for these diverging interests by simultaneously attempting to make both active and inactive investors as satisfied as possible.
  
  

Liquidity Dividends

• Liquidity dividends refer to available funds that can go to paying shareholders dividends in the short term. A business' liquidity depends on the organization's ability to convert its assets into cash to meet debt or other obligations. Since shareholder dividends represent just one obligation a company must meet, dividend policy holds important implications related to the company’s overall liquidity. The company must, therefore, develop a definitive dividend policy.
  
  

The Liquidity of Shares

• The concept of liquidity also relates to shares of stock. When a stock is considered desirable for purchase, it becomes liquid in the sense that the stock represents future dividends, the distribution of revenues from investing in the stock. While the stock does not represent cash, a stock’s popularity on the market means increased value for the company that will typically result in future dividend payments. This popularity, however, is characterized by a temporary quality, as the popularity depends on the public’s desire to continue to invest in the stock.
  
  

The Ease of Sale

• The final context for liquidity dividends relates to shareholders' ability to sell their stock. If the stock is easier to sell, there's a higher level of liquidity. This can also represent part of the company’s dividend policy, and it is common for shareholders to disagree on exactly how much the structure of the dividend policy should facilitate selling and liquidation of shares.