DIVIDEND POLICY

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DIVIDEND POLICY:

www.themegallery.com DIVIDEND POLICY

INTRODUCTION:

INTRODUCTION The term dividend refers to that part of profits of a company which is distributed by the company among its shareholders. The investors basically have two desires, a) high percentage of dividends & b) increase in their investment. These two factors influence the dividend policies. The percentage of dividend is mainly a decision of the management which is decided on the basis of the present earnings, growth rate and opportunities for expansion & diversification. since dividend is a right of shareholders to participate in the profits and surplus of the company. For their investment in the share capital of the company, they should receive fair amount of profits. The company should therefore distribute a reasonable amount as dividends to its members and retain the root funds for its growth and survival.

MEANING:

MEANING DIVIDEND :- It refers to the divisible profits of a company distributed or divided among its shareholders in proportion to their shareholdings . DIVIDEND POLICY :- It is that policy of management of a company concerning the portion of profits to be distributed to shareholders as dividend & portion of profits to be retained in the company as retained earnings. DIVIDEND DECISION :- It is concerned with allocation of profit towards payment of dividends to the shareholders as well as rate of retained earnings.

FACTORS INFLUENCING DIVIDEND POLICY:

FACTORS INFLUENCING DIVIDEND POLICY Stability of earnings Financial policy of the company Liquidity of funds Dividend policy of competitive concerns Past dividend rates Debt obligations Ability to borrow Growth need of the company Profit rate Legal requirement Policy of control Corporate taxation policy Tax position of shareholders Effects of trade cycle Attitude of interested group

TYPES/FORMS OF DIVIDEND POLICY:

TYPES/FORMS OF DIVIDEND POLICY

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REGULAR DIVIDEND POLICY The payment of dividend at the usual rate is termed as regular dividend. ADVANTAGES Establishing a profitable record of the company. Creating confidence amongst the shareholders. It aids in long term financing & renders financing easier. Establishing the market value of shares. The ordinary shares view dividends as a source of funds to meet their day-to-day living expenses.

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2. STABLE DIVIDEND POLICY The term stability of dividend means consistency or lack of variability in the stream of dividend payment to the shareholders. A stable dividend policy may be established in any of the following 3 forms: Constant dividend per share:- Some companies follow a policy of paying fixed dividend per share irrespective of the level of earnings year after year. Constant pay-out ratio:- It means payment of a fixed percentage of net earnings as dividends every year. Stable rupee dividend plus extra dividend:- Some companies follow a policy of paying constant low dividend per share plus an extra dividend in the years of high profits.

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ADVANTAGES OF STABLE DIVIDEND POLICY It creates confidence among investors towards the company. It creates regular income to investors. It attracts institutional investors. It is easy to raise additional funds for the company to expand & develop the business. It creates stability in market price of shares. It creates easy availability of debt funds. It increases the reputation of the company. It provides details about the profitability of the company, amount maintained as reserves & amount used towards the payment of dividend. It facilitates for profit maximization. It maximizes the wealth of the company. It helps for the company to survive for log term. It helps for the company to control cash flows.

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DANGERS OF STABLE DIVIDEND POLICY Once a stable dividend policy is followed by a company, it is not easier to change it. If the stable dividends are not paid to the shareholders on any account including insufficient profits, the financial standing of the company in the mind of the investors is damaged and they may like to dispose off their holdings. It adversely affects the market price of shares of the company.

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3. IRREGULAR DIVIDEND POLICY Some companies follow irregular dividend payments on account of the following: Uncertainty of earnings Unsuccessful business operations Lack of liquid resources Fear of adverse effects of regular dividends on the financial standing of the company.

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4 4. NO DIVIDEND POLICY A company may follow a policy of paying no dividend presently because of its unfavourable working capital position on account of requirements of funds for future expansion and growth.

FORMS OF DIVIDEND:

FORMS OF DIVIDEND Dividends can be classified into various forms. Profit dividends Liquidation dividends. Dividends may also be classified on the basis of medium in which the payment made. They are, Cash dividend Scrip dividend Bond dividend Property dividend Stock dividend/ Bonus shares

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CASH DIVIDEND :- It is the dividend which is distributed to the shareholders in cash out of the earnings of the business. SCRIP DIVIDEND:- The shareholders are issued transferrable promissory notes which may/ may not be interest bearing. The objective of scrip dividend is to postpone the immediate payment of cash. BOND DIVIDEND:- The shareholders may have to wait few months to convert their bonus into cash. PROPERTY DIVIDEND:- This dividend is paid in the form of some assets other than cash. STOCK DIVIDEND :- If a company does not have liquid resources, it is better to declare stock dividend.

ADVANTAGES OF STOCK DIVIDEND:

ADVANTAGES OF STOCK DIVIDEND FOR ISSUING COMPANY Maintenance of liquidity position. Satisfaction of shareholders. Enhance prestige. Widening share market. Conservation of control. Financing for expansion program. b) FOR INVESTORS Increase in their equity. Increase in income. Increased demand for shares. Increased marketability of shares.

DISADVANTAGES OF STOCK DIVIDEND:

DISADVANTAGES OF STOCK DIVIDEND FOR COMPANY Increase in capitalization of the corporation. More liabilities on the company. Prevents investors. Undiluted control over the management. b) FOR INVESTORS Disappointment of shareholders. Lowers the market value of existing shares.

OBJECTS OF STOCK DIVIDEND :

OBJECTS OF STOCK DIVIDEND Conservation of cash Financing expansion program Transferring the formal ownership of surplus and reserves to the share holders Enhanced prestige Widening share market

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