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.
Factors Affecting Dividend Policy:
1. External Factors
2. Internal Factors
External Factors Affecting Dividend Policy
1. General State of Economy:
2. State of Capital Market:
3. Legal Restrictions:
Companies Act has laid down various restrictions regarding the declaration of dividend:
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]
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
There are many different factors that affect business policy. These different factors range from shareholders to the dividend policy of a certain business.
factors determining dividend policy of a co
Internal factors are:the firms dividend policyinvestment policycapital risk structureexternal factors will be:-interest rate going up or downtax ratethe market's performance
as finance manager what is your role in matter of dividend policy.
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 objectives * Requirements of institutional investors * Stability of dividends * Liquid resources .
concept of dividend policy
The difference between a passive and an active dividend policy lies in the amount of time between dividend disbursement. In a passive dividend policy, dividends are given when the company decides it is time. With an active dividend policy, dividends are disbursed at regular intervals.
Dividend policy is a set of rules that a company uses to determine how much of its earnings it will pay to shareholders. Stable dividend policy means all payments are equal.
government policy intrest rate parity balance of payment changes
A policy of paying a low regular dividend plus a year-end extra in good years is a compromise between a stable dividend and a constant payout rate.This policy gives the firm flexibility.
Factors that affect pricing policy are competitor actions and the competitive landscape. Changes in the economy can also affect pricing policy. Changes in demand can affect pricing. Changes in supplies and operations can change prices as well.
setting a dividend price that does not necessarily conform with retained earnings
Jollibee has paid shareholders only 1 dividend in the company's history.
Historical, Technological, Agricultural, Coastal, Policy and much more. Glad to help...if this was helpful.
Dividend policy is the set of rules a business uses to determine how much of its earnings will go to shareholders. Features include equity, income, expenses and overall profit.
i dnt know the answer.......sorry
it suggest that dividend has an impact on share price because they communicate information, signals about the firms profitability.
The advantages of dividend policies are that they provide an outline of what the investor can expect from the company regardless of what the policy is. Stable dividends are typically preferred over fluctuating dividends. The main disadvantage of dividend policies is that is they are too generous, the company may struggle and if they attempt to reduce the dividend then investor's can become disenchanted as it is considered a cut in pay.
Dividend policies are concerned with the financial policies that have to do with how, when, and how much regarding paying cash dividend. Dividend policy theories explain the reasoning and arguments that relate to paying dividends by firms Dividend theories include the dividend irrelevance theory that indicates there is no effect on the capital structure of a company or its stock price from dividends.
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 in some sort of way, whether it be in the mouth or through the tight little whole.
The price earnings ratio is influenced by: -the earnings and sales growth of the firms -risk -debt-equity structure of the firm -dividend policy -quality of management -a number of other factors
Factors affecting policymaking depend widely upon the circumstances and place in which one finds oneself. Policies can be instituted in one place that might be considered scandalous, crude, or even downright offensive in one country but might be perfectly acceptable in another. Official policy really depends upon who is also in the position of being able to make policy, which is another consideration entirely altogether.
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.