Factors affecting dividend policy?

already exists.

Would you like to merge this question into it?

already exists as an alternate of this question.

Would you like to make it the primary and merge this question into it?

exists and is an alternate of .

Dividend Decision
Meaning: Dividend is that part of the profits of a company which is distributed amongst its shareholders.
Definition: According to ICAI, "Dividend is a distribution to shareholders out of profits or reserves available for this purpose."

Nature of Dividend Decision
The dividend decision of the firm is crucial for the finance manager because it determines:
1. the amount of profit to be distributed among the shareholders, and
2. the amount of profit to be retained in the firm.
There is a reciprocal relationship between cash dividends and retained earnings.
While taking the dividend decision the management take into account the effect of the decision on the maximization of shareholders' wealth.
Maximizing the market value of shares is the objective.
Dividend pay out or retention is guided by this objective.

Dividend Policy
Factors Affecting Dividend Policy:
1. External Factors
2. Internal Factors

External Factors Affecting Dividend Policy
1. General State of Economy:
  • In case of uncertain economic and business conditions, the management may like to retain whole or large part of earnings to build up reserves to absorb future shocks.
  • In the period of depression the management may also retain a large part of its earnings to preserve the firm's liquidity position.
  • In periods of prosperity the management may not be liberal in dividend payments because of availability of larger profitable investment opportunities.
  • In periods of inflation, the management may retain large portion of earnings to finance replacement of obsolete machines.

2. State of Capital Market:
  • Favourable Market: liberal dividend policy.
  • Unfavourable market: Conservative dividend policy.

3. Legal Restrictions:
Companies Act has laid down various restrictions regarding the declaration of dividend:
  • Dividends can only be paid out of:
  • ** Current or past profits of the company.
    • Money provided by the State/ Central Government in pursuance of the guarantee given by the Government.
  • Payment of dividend out of capital is illegal.
  • A company cannot declare dividends unless:
  • ** It has provided for present as well as all arrears of depreciation.
    • Certain percentage of net profits has been transferred to the reserve of the company.
  • Past accumulated profits can be used for declaration of dividends only as per the rules framed by the Central Government

4. Contractual Restrictions:
Lenders sometimes may put restrictions on the dividend payments to protect their interests (especially when the firm is experiencing liquidity problems)
A loan agreement that the firm shall not declare any dividend so long as the liquidity ratio is less than 1:1.
The firm will not pay dividend more than 20% so long as it does not clear the loan.

Internal Factors affecting dividend decisions
1. Desire of the Shareholders:
Though the directors decide the rate of dividend, it is always at the interest of the shareholders.
Shareholders expect two types of returns:
[i] Capital Gains: i.e., an increase in the market value of shares.
[ii] Dividends: regular return on their investment.
Cautious investors look for dividends because,
[i] It reduces uncertainty (capital gains are uncertain).
[ii] Indication of financial strength of the company.
[iii] Need for income: Some invest in shares so as to get regular income to meet their living expenses.
2. Financial Needs of the Company:
If the company has profitable projects and it is costly to raise funds, it may decide to retain the earnings.
3. Nature of earnings:
A company which has stable earnings can afford to have an higher divided payout ratio
4. Desire to retain the control of management:
Additional public issue of share will dilute the control of management.
5. Liquidity position:
Payment of dividend results in cash outflow. A company may have adequate earning but it may not have sufficient funds to pay dividends

Stability of Dividends
The term stability of dividends means consistency in the payment of dividends. It refers to regular payment of a certain minimum amount as dividend year after year.
Even if the company's earnings fluctuate from year to year, its dividend should not. This is because the shareholders generally value stable dividends more than fluctuating ones.
Stable dividend can be in the form of:
1. Constant dividend per share
2. Constant percentage
3. Stable rupee dividend plus extra dividend

Significance of Stability of Dividend
1. Desire for current income
2. Sign of financial stability of the company
3. Requirement of institutional investors
4. Investors confidence in the company

Danger of Stable Dividend Policy
Stable dividend policy may sometimes prove dangerous. Once a stable dividend policy is adopted by a company, any adverse change in it may result in serious damage regarding the financial standing of the company in the mind of the investors.

Forms of Dividend
1. Cash Dividend:
The normal practice is to pay dividends in cash.
The payment of dividends in cash results in cash outflow from the firm. Therefore the firm should have adequate cash resources at its disposal before declaring cash dividend.
2. Stock Dividend:
The company issues additional shares to the existing shareholders in proportion to their holdings of equity share capital of the company.
Stock dividend is popularly termed as 'issue of bonus shares.'
This is next to cash dividend in respect of its popularity.
3. Bond Dividend:
In case the company does not have sufficient funds to pay dividends in cash it may issue bonds for the amount due to shareholders.
The main purpose of bond dividend is postponement of payment of immediate dividend in cash. The bond holders get regular interest on their bonds besides payment of the bond money on the due date.
[Bond dividend is not popular in India]
4. Property Dividend:
This is a case when the company pays dividend in the form of assets other than cash. This may be in the form of certain assets which are not required by the company or in the form of company's products.
[This type of dividend is not popular in India]

Bonus Shares
When the additional shares are allotted to the existing shareholders without receiving any additional payment from them, is known as issue of bonus shares.
Bonus shares are allotted by capitalizing the reserves and surplus.
Issue of bonus shares results in the conversion of the company's profits into share capital. Therefore it is termed as capitalization of company's profits.
Since such shares are issued to the equity shareholders in proportion to their holdings of equity share capital of the company, a shareholder continues to retain his/ her proportionate ownership of the company.
Issue of bonus shares does not affect the total capital structure of the company. It is simply a capitalization of that portion of shareholders' equity which is represented by reserves and surpluses.
It also does not affect the total earnings of the shareholders  
13 people found this useful

What are dividends?

Earnings that are distributed to shareholders as dividends. They are stated in dollar amount per share and paid quarterly. Dividend Reinvestment Programs (DRP) give you the option of reinvesting dividends to purchase additional stock shares. Dividends are taxable income in the year they are paid. D (MORE)

How would the price of a stock be affected by its dividend?

Answer . Paying a dividend costs the company and as such will decrease the value of the company and the stock.. Answer . If all other factors are equal, a buyer would prefer a stock that is expected to pay the higher dividend. If Company A is expected to pay $10 per share annually and Compan (MORE)

What factors are considered before dividends are paid out?

A corporation's responsibilities include increasing shareholder value. Dividends can play an important role in this regard. A company has to decide what to do with excess cash on its books but there are several options. They could reinvest that money into the company. This could be purchasing new eq (MORE)

What factors do firms consider before dividends are declared?

\n. \n Dividend Considerations \n. \nA corporations responsibility is to increase shareholder value. Dividends can play an important roll in this regard. A company has to decide what to do with excess cash on its books but there are several options. They could reinvest that money into the comp (MORE)

What is a dividend?

General Math A dividend is the number that is divided by the divisor. The answer would be the quotient. In a mathematical sentence it would look like this: dividend divided by the divisor equals the quotient . Investing A dividend is a payment made to the shareholders as a way to share (MORE)

Define DebtEquity Mix and Dividend Policy?

Debt-Equity mix refers to the Proportion of debt and equity with which a Company's Assets are being financed.. Debt means the amount of money company has borrowed from lenders, and the company has Legal Liability to pay back that amount alongwith the interest agreed, at the maturity date.. Equity (MORE)

What is dividend?

Well a dividend is the number inside of the box when you divide For example 25 divided by 5. In this case 25 is the dividend now to help you out if you dont want to remember all of that above this then think about this a dividend is like a bears den like in the word dividend you can see it has t (MORE)

Does the dividend policy followed by companies affect share price?

The dividend policy directly affects share price. There is a technique for share valuation known as the dividend growth model (DGM). The fundamental theory is that one would add up the present value of all upcoming dividends for that company, the sum of which would equate to the current stock price. (MORE)

What is the dividend?

I think that dividend is cash back of dividend investors. It is a total return of money, which investor reinvested also. After retirement a retired person, also take benefit with dividend investments.

What are the different types of dividend policies?

Types of Dividend Policy: a. Stable Dividend Policy b. Fluctuating Dividend Policy c. Small Constant Dividend per Share plus Extra Dividend. Forms of Dividend . · Cash Dividend Cash dividends(most common) are those paid out in the form of a cheque. Such dividends are a for (MORE)

What are the 3 major theory of dividend policy?

Residual Theory of dividend policy The essence of the residual theory of dividend policy is that the firm will only pay dividends from residual earnings, that is, from earnings left over after all suitable (positive NPV) investment opportunities have been financed. Retained earnings are the most i (MORE)

Definition of stable dividend policy?

Dividend policy is a set of rules that a company uses to determinehow much of its earnings it will pay to shareholders. Stabledividend policy means all payments are equal.

Meaning and factors effecting dividend policy?

A dividend policy is a company's approach to distributing profits back to its owners or stockholders. If a company is in a growth mode, it may decide that it will not pay dividends, but rather re-invest its profits (retained earnings) in the business. If a company does decide to pay dividends, it mu (MORE)

What is Stable dividend policy?

It is that policy which has stable payout ratio. By Parul Khanna Stable Dividend Policy? Stabile dividends have a positive impact on the market price of shares. If dividends are stable it reduces the chance of speculation in the market and investors desiring a fixed rate of return will natura (MORE)

Details about dividend policy?

A dividend is nothing but a periodic sharing of profit by the company with its share holders. The dividend is usually declared as a % of the face value of the share. A 100% dividend on a share with a face value of 1$ means you would get $1 for every share of that company you hold.

What is dividend theories and policies?

Dividend policies are concerned with the financial policies thathave to do with how, when, and how much regarding paying cashdividend. Dividend policy theories explain the reasoning andarguments that relate to paying dividends by firms Dividendtheories include the dividend irrelevance theory that in (MORE)

Factors that effect the dividend decisions of a company?

Factors affecting dividend decisions of a company are:. Legal restrictions . Magnitude and types of trends . Desire and type of shareholders . Nature of industry . Age of the company . Future financial requirements . Government`s economic policy . Taxation policy . Inflation . Control obje (MORE)

The difference between a passive and an active dividend policy.?

The difference between a passive and an active dividend policy liesin the amount of time between dividend disbursement. In a passivedividend policy, dividends are given when the company decides it istime. With an active dividend policy, dividends are disbursed atregular intervals.

Does a special dividend affect firm value?

Any dividend will negatively impact firm value immediately after issue because a dividend represents a negative cash flow to the company.. Special dividends can positively and negatively affect firm value depending on the reason for the special dividend. Firm value is impacted positively by spe (MORE)

What are the factors affecting pricing policy?

Factors that affect pricing policy are competitor actions and thecompetitive landscape. Changes in the economy can also affectpricing policy. Changes in demand can affect pricing. Changes insupplies and operations can change prices as well.

Advantages and disadvantages of dividend policy?

The advantages of dividend policies are that they provide anoutline of what the investor can expect from the company regardlessof what the policy is. Stable dividends are typically preferredover fluctuating dividends. The main disadvantage of dividendpolicies is that is they are too generous, the co (MORE)

What is zero dividend policy and what it show about the company?

Zero dividend policy refferes to the policy of share holders being sucked off hard by the director and agreeing not to pay dividends. This is then followed by an entry through the "back door" as they say, with some anal bleeding. Some may say this is the best dividend policy as all parties benefit i (MORE)

How does dividends affect net income?

Answer: Dividends are a distribution of net income. That means dividends is not included in the calculation of net income. Dividend payments do affect net income indirectly . If a company pays a dividend, cash is reduced. This cash can no longer be used to generate profits. That is why 'cash cow' (MORE)

What is the goal of dividend policy?

The aim of this decision is to retain the resources in the business that are required to run the business or make additional investments in the business, as long as the returns earned exceed the required return.

Will dividends and capital gains affect social security payments?

In general, the size of our Social Securityretirement checks will depend on your lifetime earnings record andthe age that you begin collecting your benefits. If you startcollecting payments prior to reaching your Full Retirement Age(FRA) which for the most part is 66 or 67, depending on your yearof (MORE)

How can a company pay dividend without affecting its cash balance?

Company can pay dividend in the form of bonus share without affecting the cash balance. For example if some one has 10 shares of $10 each, company simply can give him dividend of 5 bonus shares and now that person have 15 shares of total $100. So before bonus shares 10 shares of total of $1 (MORE)

A dividend is?

the money paid to the shareholders for sharing in the profits ofthe company. A+ . Also the number being divided in a division (equates to thenumerator in a vulgar fraction).

How do stock dividends affect stock indexes?

The stock that forms the part of the index will have a weight in the index, i.e. how much the movement of that stock affects the movement of the index. When a dividend goes ex, this will trigger a 'drop point' on the index. This is calculated from the value of the dividend, the weight in the index (MORE)

What can generally not be a source of life insurance policy dividends?

Dividends are paid only by mutual insurance companies, not by stockinsurance companies. All insurance companies are required by thestate regulatory authorities where they do business to maintainstatutory reserves to ensure that there is sufficient money on handto pay expected losses. Therefore, divi (MORE)

What factors affect government policy?

The Constotution should be the government's policy but Pres.Obama ( or should I even call him president) is the one of the factors that effects the policy of the government.

What are the features of dividend policy?

Dividend policy is the set of rules a business uses to determinehow much of its earnings will go to shareholders. Features includeequity, income, expenses and overall profit.

How does Walter formula of dividend distribution help in understanding the dividend policies?

The term dividend refers to that part of after-tax profit which is distributed to the owners (shareholders) of the company. The undistributed part of the profit is known as Retained earnings. Higher the dividend payout, lower will be retained earnings. The dividend policy of a company refers to the (MORE)

What underwriting factors affect a standard fire policy?

Standard fire policy, is the insurance cover against perils such as fire, lightining, domestic explosion of boiler or gases. Underwritting for this policy, will involve examining exposure of fire risks at the building, for fire risks that may be caused by explosion, if there sources of explosion wi (MORE)

What are the advantages and disadvantages of a stable dividend policy?

Stable dividend policy has following advantages: 1. It creates confidence among shareholders; 2. Stabilizes the market value of share of the company; 3. It helps in marinating the goodwill of the company; 4. Helps in giving regular income to the shareholders. Disadvantage: (well I am also (MORE)

How does dividend affect share price?

The dividend is very attractive to potential investors, and if more people are buying the stock the price will go up. Also, on the days leading towards the ex-dividend date (the day you must own the stock to collect the dividend) many investors and institutions will buy up the stock to make a quick (MORE)

What describes dividends paid on life insurance policies?

A dividend represents a distribution of earnings made by a mutual life insurance company to its policyholders. From the standpoint of corporate structure, a mutual company is owned by the policyholders--therefore, they benefit from the earnings. The distribution may be in cash, by additional paid-u (MORE)

What are the dividends?

1. A distribution of a portion of a company's earnings, decided bythe board of directors, to a class of its shareholders.

What does dividend?

Dividend is a sum of money paid regularly by a company to itsshareholders out of its profits.

What is a life insurance policy dividend?

It's a payment made to the policy owner by the mutual insurancecompany when there is a profit. The policyholders are the owners ofa mutual life insurance company and they share in the profits byreceiving dividend payments from the insurance company.