Some of the limitations of stable dividend policy are as follows:

(1) Inflexible: Once a company adopts a stable dividend policy, it cannot be changed easily. If any change like lowering of dividend rate due to depression in the market, it will adversely affect the credit standing of the company and also attitude of the investors towards the company. If a company, with a pattern of stable dividends, misses dividend payment in a year, this break will have an effect on investors more severe than the failure to pay dividend by a company with unstable dividend policy. Dividends are 'sticky' in the sense that they are slow to change and lag behind shifts in earnings by one or more periods.

(2) Against the Principle of Equity Shares: To pay a fixed dividend from year to year is against the principle of equity shares. The equity shareholders are the real risk bearers of business and they expect a fair return for the risk that they undertake. While the stable dividend policy treats ordinary shareholders on par with preference shareholders, whose rate of dividend is fixed in advance. This goes against the principle of ordinary shares.

(3) Restricts Freedom of Board: If a fixed dividend is to be paid, it affects the freedom of management adversely in determining the rate of dividend. They neither are not able use their discretion in determining the rate of dividend nor are they able to take into account the need for finance for future expansion. During lean years they are not able to reduce rate of dividend. A way out is that the rate of dividend should be fixed at a conservative figure, which could be maintained during lean years and an extra dividend may be paid to give benefit of higher earnings to the shareholders. This is because the effect of dropping an extra dividend during lean years would not be as severe as the failure to pay regular dividend.

(4) Less Attractive for Some Investors: There are investors who are prepared to take risk and would be attractive towards such scrips which fluctuate greatly. Hence, they do not prefer to invest in shares of companies following stable dividend policy, whose share prices also remain stable, though at high level. They do not get the benefit of capital gains in such scrips.

(5) Over or Under capitalization : Due to stable rate of dividend, the profits accumulated as retained earnings goes on fluctuating with rising or falling earnings of the business from year to year. Hence, the equity of the shareholders will go on changing, resulting into over-capitalization or under-capitalization.