In this article, you’re going to know about What is Dividend Policy and
Factors affecting Dividend policy.
What is Dividend policy?
The dividend policy is the policy that the company uses to shareholders to structure their dividend payments. Some researchers suggest that in theory, the dividend policy can be irrelevant. Because investors can sell a share of their shares or portfolios if they require money.
A company is collecting money from various sources, including debentures, preference shares, and equity shares. Payments to debenture holders and preference to shareholders are at a fixed rate. There is no commitment to equity shareholders in case of returns. If there is a loss, then no payment will be made to them, however, if there is any benefit. Then the company has to decide whether to pay dividends or not. The dividend is to be paid, then the amount to be paid should be decided. It will be decided in such a way that it can maximize shareholder’s property. There are different types of dividend policies – Regular, stable, stable and irregular. In this post, we will discuss various factors affecting dividend policy.
Factors Affecting Dividend Policy
Cash Needs of a Company:
Cash status is a big criterion for paying dividends. For a company, cash has required for various contingencies. They can not be ignored for the existence of a company. The dividend policy should be made after serious consideration of the company’s cash position.
Existence of Earned Surplus:
A company can not pay dividends out of capital. The dividend is payable by the current profit or accumulated profits of any company. It can pay after providing depreciation as per the Companies Act.
The ownership structure of any company affects the policy. Holding company with higher promoter will give less dividend payments. Because the payment of dividend can lead to a fall in the value of the stock. Whereas, higher institutional ownership will support high dividend payments. It helps in increasing control over management.
Different Shareholder’s Expectations
Another factor which influences the policy is. The diversity of the shareholders’ type, which a company possesses. There will be different expectations in a different group of shareholders. A retired shareholder will have a different requirement for a wealthy investor. The company needs to clearly understand the different expectations and prepare a successful dividend policy. Cash dividends will give more satisfaction to shareholders than appreciation of capital.
A company has more profits in its financial structure and, consequently. Higher interest payments can made to make decisions for lower dividend payments. So that their net worth increases and to ensure that it can make payment of financial charges even in case of earning of the company is falling. However, the company that uses its own financing will prefer higher dividends.
Need for Growth and Expansion:
A company has brought to not remain stable. It has to be developed and expanded. For this, the cash flow should be present. Not every amount can spend on the payment to the shareholders in the form of a dividend. This will limit the scope of its development and expansion.
Many companies adhere to the conservative dividend policy and provide liberal plowing for returning profits in the business. These sustained earnings use for expansion. And development as a source of internal finance.
Steady and Stable Dividend Policy:
An ideal dividend policy rests on the principle of sustainability. Attractive dividend rate – After providing for proper, regular and steady income – should be aimed at. So, The regularity of dividends depends on the stability of income, dividend equation reserved and adequate free stock.
Distribution of good amount in the form of dividends due to huge profits is not a sound dividend policy. Conservation of additional benefits for future needs is a prudent step towards a regular dividend policy.
A stable dividend policy makes long-term planning easier. Thus the loan eligibility of the company has increased. The market value of shares is also stable. By encouraging shareholders’ trust, shares of such company subjects to at least speculation.
Corporate tax will directly or indirectly affect the dividend policy. Taxes make the residual income lower after making available to the shareholders directly. If the dividend income is taxable in the hands of the investor and the capital gains are exempt. Then, the company can maintain its earnings. So that the price increase per share, which ultimately gives the investors higher returns and vice versa.
Besides, if it is possible that all shareholders should divide into higher or less tax brackets accordingly the dividend policy can prepare. Finally, the objective is to give maximum returns to shareholders.
Liquidity is directly related to the dividend policy. The company with high profit, the working capital can have a majority of the blocking benefits. Or it can acquire the property. In that situation, its liquidity is bad. So, The company should pay less dividend. Higher dividend payments are possible only if the company has good earnings and sound liquidity.
There are some legal restrictions on companies for dividend payments. Payment of dividends is legal only if the capital post-payment is not less. These rules are to protect the interest of the creditors. It is compulsory to provide the most important depreciation before paying dividends. Depreciation is to be provided at the minimum rates provided. So, Providing depreciation is very important. As it is able to maintain the quantity of profit for future replacement of fixed assets with that company. So, now you know 10 Factors affecting Dividend policy.
“To maintain the balanced rate of dividend distribution, the company’s directors should comply with some rates”.
- Since starting the business, dividends should not pay for the first few years.
- It is to manage the expense accounts of the company in such a way to reduce the fluctuation in the minimum surplus profit.
- In any one year, only one part of the benefit in dividends is to be given.