Unit 06 : Dividend Policy
i Ii
Dividend Decisions
Adividendis a paymentmade by a corporation to its shareholders usually as
a distribution ofprofits When a corporation earns a profit or a surplus the
dividend netprofitsdistributed
among
shareholders
corporationis able to reinvesttheprofit in the business retainedearnings and
pay a proportion oftheprofit as dividend to
shareholders
ratio
P ayout
High
Janis ation
t igion Thisdisposition ofearningsis a fundamentalproblem infinancialmanagement
lowPayoutratio candividendsmore
funds the managementof an enterprise has an importantfinancialdecision to decide
forenpansion growth
aboutthe disposition income aftermeeting all business expenses
of
total businessprofits a portion is retained
vidend
policydecisionsinvolve aimportantq uestions ofthe forreinvestment in the
what
of bepaidoutovertime
fraction earningss hould
businessandtherest is distributed to shareholders as dividend
t he
hould firmmaintain asteadystable g rowth
vigand
Dividend Policy it is the decision concerned withpaying dividends to the
ofthebusiness
shareholders
itsaimis to maximise shareholders return which in turn lea
to manimisation ofvalue of investment
it indicates the performance
ofthefirmto the investors lende
bankers society ingeneral
yardstick through which market value ofshares is measured
highly sensitive to behavior of investors
itsobjective shouldbe to divertfundsfrom the less
productive operations to moreproductive ones
ofthe managementfindsitselfin a declining industry theywant to
operations and
forthebusinessshareholders
retainmorefunds payoutless so as to conserve
funds Whichisnotbeneficialfor Theymayalso try to retainfu
forother profitable investments so continuity of the corporation can be
Forms dividend
of
cashdividend flow
offunds networthofcompany
reduces requiresliquidresources
Scrip Bonddividend promise topayat afuturedate issuesnotes orbonds
Propertydividend paidinformofassets
stockdividend inueof
bonusshares
ofearnings doesn'taffectcashposition
throughcapitalization
, maintained
Determinants
of Dividend decisions
stabilityofEarnings stable andgrowing earnings allow companies to maintain
ahighdividendpayout consistently supporting a reliable dividendpolicyandbuildin
shareholder confidence Firmswith volatileearnings keeppayoutlow
FinancingPolicy ofCompany the approach a companytakestowardsfinancing suc
as whether itprefersequity or debt influences dividenddecisions Firms
relying
internalfinancingusually retain moreearnings While
firmswitheasier acc m
financingpay higherdividends
liquidity ofFunds sufficientcashandliquidassets are necessary
forpayingcas
dividends Evenprofitable companies
may limitdividends ifliquidity islow Otherwise
theymayresort to otherformsof dividend
DividendPolicy
ofCompetitiveConcerns companies oftenobserve dividendpolicies
ofi
competitors which may push highpayout or lowpayout strategies depending
plaitdidEndpites
firmswith a history ofpayingstable orrising dividends ten
tomaintain orgradually increasehighpayoutratiostosustain investortrust Changing
payoutratios drastically mayhurtmarketperception so companies often matchpayou
policiesto historical trends
DebtObligation Heavydebt loads leadto lowerpayoutratios as earnings ar
retained to meetinterests and principalpayments Cow or manageable debt
levels enable
highpayout ratios as lesscashneedstobepreservedforfinancing
costs
Growthneeds ofCompany Highgrowth firmsrequire more retainedearnings
forexpansion usually adopting lowpayout ratios Mature companies withfew
growth opportunities often distribute more earnings as dividends
Profitp ositionofCompany firmsearningmoreprofitdistribute more dividends
kindofdividend
TypeofSecurity Timings Mode
ofPayment
Interim Regular cash stock scriptBond
Preference Equity
, Market considerations the risk return concept also applies to thefirm's
dividendpolicy A
firmwhere dividends fluctuatefromtime totime will be
viewed as risky andinvestors will require a highrateofreturn Thus a firms
dividendpolicyalsodepends on the marketsprobableresponse to certain types
of
policy
thetanpolicyofthe government alsoaffects thedividendpolicy
when thegovernmentgivestanincentives thecompanypays more dividends
TypesofDividendPolicies
StableDividends in thistypeof a policy a company maintains a constant
dividendrate irrespective
ofactualearnings level Thecompanytriesto maintain
of3importantforms
consists itevenwhen duringrecession earnings godown belowactualdividendpay tryin
dividend
constant
pershare tosignaltothe investors thatthis is temporary Companiesexpectinvestors willplac
constantpayout ratio
a premium on theshares
stableruppeedividend entra
dividend of a companywhichpaysstabledividends onlyincreases
dividendpaymentwhen increase can be maintained
manyfirms set a
benchmark targetpayoutratio
Target PayoutRatio orrang
Theyonlydeviatefromthistargetto achieve relativelystabledividends orstable and
occasionally increasing ones
Extradividends when a company earns above averageearnings because
of
anyreasonbutwhich is nonrecurring in nature it proposes an extra dividend
overandabove the regulardividend it pays Dueto divestmentof a plant or
businessoperations
company has no utilization ofthe same
Regulardividendpolicy dividendpayable at the usualrate is called as
regulardividendpolicy Its suitable to small investors retiredpeople
i Ii
Dividend Decisions
Adividendis a paymentmade by a corporation to its shareholders usually as
a distribution ofprofits When a corporation earns a profit or a surplus the
dividend netprofitsdistributed
among
shareholders
corporationis able to reinvesttheprofit in the business retainedearnings and
pay a proportion oftheprofit as dividend to
shareholders
ratio
P ayout
High
Janis ation
t igion Thisdisposition ofearningsis a fundamentalproblem infinancialmanagement
lowPayoutratio candividendsmore
funds the managementof an enterprise has an importantfinancialdecision to decide
forenpansion growth
aboutthe disposition income aftermeeting all business expenses
of
total businessprofits a portion is retained
vidend
policydecisionsinvolve aimportantq uestions ofthe forreinvestment in the
what
of bepaidoutovertime
fraction earningss hould
businessandtherest is distributed to shareholders as dividend
t he
hould firmmaintain asteadystable g rowth
vigand
Dividend Policy it is the decision concerned withpaying dividends to the
ofthebusiness
shareholders
itsaimis to maximise shareholders return which in turn lea
to manimisation ofvalue of investment
it indicates the performance
ofthefirmto the investors lende
bankers society ingeneral
yardstick through which market value ofshares is measured
highly sensitive to behavior of investors
itsobjective shouldbe to divertfundsfrom the less
productive operations to moreproductive ones
ofthe managementfindsitselfin a declining industry theywant to
operations and
forthebusinessshareholders
retainmorefunds payoutless so as to conserve
funds Whichisnotbeneficialfor Theymayalso try to retainfu
forother profitable investments so continuity of the corporation can be
Forms dividend
of
cashdividend flow
offunds networthofcompany
reduces requiresliquidresources
Scrip Bonddividend promise topayat afuturedate issuesnotes orbonds
Propertydividend paidinformofassets
stockdividend inueof
bonusshares
ofearnings doesn'taffectcashposition
throughcapitalization
, maintained
Determinants
of Dividend decisions
stabilityofEarnings stable andgrowing earnings allow companies to maintain
ahighdividendpayout consistently supporting a reliable dividendpolicyandbuildin
shareholder confidence Firmswith volatileearnings keeppayoutlow
FinancingPolicy ofCompany the approach a companytakestowardsfinancing suc
as whether itprefersequity or debt influences dividenddecisions Firms
relying
internalfinancingusually retain moreearnings While
firmswitheasier acc m
financingpay higherdividends
liquidity ofFunds sufficientcashandliquidassets are necessary
forpayingcas
dividends Evenprofitable companies
may limitdividends ifliquidity islow Otherwise
theymayresort to otherformsof dividend
DividendPolicy
ofCompetitiveConcerns companies oftenobserve dividendpolicies
ofi
competitors which may push highpayout or lowpayout strategies depending
plaitdidEndpites
firmswith a history ofpayingstable orrising dividends ten
tomaintain orgradually increasehighpayoutratiostosustain investortrust Changing
payoutratios drastically mayhurtmarketperception so companies often matchpayou
policiesto historical trends
DebtObligation Heavydebt loads leadto lowerpayoutratios as earnings ar
retained to meetinterests and principalpayments Cow or manageable debt
levels enable
highpayout ratios as lesscashneedstobepreservedforfinancing
costs
Growthneeds ofCompany Highgrowth firmsrequire more retainedearnings
forexpansion usually adopting lowpayout ratios Mature companies withfew
growth opportunities often distribute more earnings as dividends
Profitp ositionofCompany firmsearningmoreprofitdistribute more dividends
kindofdividend
TypeofSecurity Timings Mode
ofPayment
Interim Regular cash stock scriptBond
Preference Equity
, Market considerations the risk return concept also applies to thefirm's
dividendpolicy A
firmwhere dividends fluctuatefromtime totime will be
viewed as risky andinvestors will require a highrateofreturn Thus a firms
dividendpolicyalsodepends on the marketsprobableresponse to certain types
of
policy
thetanpolicyofthe government alsoaffects thedividendpolicy
when thegovernmentgivestanincentives thecompanypays more dividends
TypesofDividendPolicies
StableDividends in thistypeof a policy a company maintains a constant
dividendrate irrespective
ofactualearnings level Thecompanytriesto maintain
of3importantforms
consists itevenwhen duringrecession earnings godown belowactualdividendpay tryin
dividend
constant
pershare tosignaltothe investors thatthis is temporary Companiesexpectinvestors willplac
constantpayout ratio
a premium on theshares
stableruppeedividend entra
dividend of a companywhichpaysstabledividends onlyincreases
dividendpaymentwhen increase can be maintained
manyfirms set a
benchmark targetpayoutratio
Target PayoutRatio orrang
Theyonlydeviatefromthistargetto achieve relativelystabledividends orstable and
occasionally increasing ones
Extradividends when a company earns above averageearnings because
of
anyreasonbutwhich is nonrecurring in nature it proposes an extra dividend
overandabove the regulardividend it pays Dueto divestmentof a plant or
businessoperations
company has no utilization ofthe same
Regulardividendpolicy dividendpayable at the usualrate is called as
regulardividendpolicy Its suitable to small investors retiredpeople
