Lintner’s Model: Understanding Dividend Decisions in Australia (2025 Guide)

Dividends are the heartbeat of many Australian share portfolios, but the question remains: how do companies actually decide how much to pay out each year? The answer often lies in a theory that’s stood the test of time—Lintner’s Model. First developed in the 1950s, this framework is still highly relevant for understanding the conservative, measured approach taken by many ASX-listed firms in 2025. Let’s unpack Lintner’s Model, how it’s applied today, and what it means for investors navigating Australia’s dynamic dividend landscape.

What is Lintner’s Model?

Lintner’s Model is a classic approach to understanding how companies set their dividend payouts. Economist John Lintner, after surveying U.S. corporate managers, found that companies prefer a steady, predictable dividend policy rather than swinging payouts with every earnings change. The model boils down to two key insights:

• Companies have a target dividend payout ratio—the proportion of earnings they aim to distribute.

• They adjust actual dividends gradually toward this target, rather than making abrupt changes year-to-year.

Mathematically, the model is often summarised as:

Dt = Dt-1 + a [bEt - Dt-1] Where:

• Dt: Dividend this year

• Dt-1: Last year’s dividend

• a: Speed of adjustment (0 < a < 1)

• b: Target payout ratio

• Et: Earnings this year

Lintner’s Model in the 2025 Australian Context

Australian companies have long embraced dividend stability, making Lintner’s Model especially relevant here. In 2025, this approach is even more pronounced as economic volatility and regulatory shifts (such as ongoing changes to franking credits and climate-related reporting) keep boards cautious. Here’s how the model shows up on the ASX today:

• Slow, Steady Adjustments: Companies like the big four banks (e.g., NAB, CBA) and top miners (e.g., BHP) rarely make large, sudden dividend increases or cuts. Even when profits surge, increases are usually incremental, reflecting the “partial adjustment” concept of Lintner’s Model.

• Communication and Signalling: Boards are acutely aware that a sudden dividend cut can spook investors. By following Lintner’s gradual approach, companies manage market expectations and signal confidence in their ongoing profitability.

• Policy Updates: With the Albanese government reviewing tax and superannuation policy in 2025, many firms have emphasised “sustainable” dividends in their annual reports—echoing the Lintner philosophy of not over-committing during good times.

Example: In 2025, BHP reported a bumper profit due to iron ore prices but opted for a modest dividend increase, citing the need for capital discipline and future investment—classic Lintner in action.

Why Lintner’s Model Still Matters for Investors

Understanding Lintner’s Model isn’t just for finance academics—it has real implications for anyone holding Aussie shares, especially those relying on dividend income:

• Predictability Matters: Investors seeking stable income (think retirees and SMSFs) can use Lintner’s logic to anticipate how companies might react to changing profits.

• Beware of ‘One-Off’ Surges: A sudden jump in earnings doesn’t guarantee a matching jump in dividends. Boards are likely to ‘smooth’ payouts, keeping increases manageable to avoid future cuts.

• Dividend Growth Signals: If a company consistently raises dividends at a steady clip, it often signals board confidence in long-term earnings power—a key insight for stock pickers.

For those eyeing high-yield stocks, it’s also important to watch for signs a company is stretching beyond its sustainable payout—something Lintner’s Model would caution against.

What’s Next for Dividend Policy in Australia?

With interest rates stabilising and the RBA’s 2025 outlook pointing to modest economic growth, many analysts expect ASX dividend growth to remain steady but unspectacular. Lintner’s Model will likely stay at the core of boardroom thinking, especially as companies balance shareholder demands with the need for investment in areas like technology and decarbonisation.

For investors, tuning into this measured, methodical approach to dividend policy can help set realistic income expectations—and spot the companies best positioned for long-term success.