DIVIDEND POLICY

Definition:

Dividend Policy means that decision of the management through which it is determined how much of net profits are to be distributed as dividend among the shareholders and how much to be retained in the business.

Approaches to Dividend Decisions

1. As a Long-term Financing Decision i) Sufficient Profitable Projects are available

ii) Capital Structure needs Equity Funds

2. As a Maximisation of Wealth Decision

Significance :

Determination of dividend policy of the firm is one of the important financial decisions of the management. Three main decisions are taken in the financial management. These are:

i) Investment Decisions

ii) Financing Decision

iii) Dividend Decisions

Kinds of Dividend: Cash Dividend Stock Dividend or Bonus Shares Interim Dividend Extra Dividend Property Dividend Scrip Dividend Bond Dividend Composite Dividend

Advantages of Stock Dividend

A. To Shareholders:

i) Tax Benefit

ii) Indication of Higher Future Profits

iii) Future Dividends may Increase

iv) High Psychological Value

v) Retains Proportional Ownership for shareholders

To Company :

i. Conserves Cash

ii. Only Means to Pay Dividend in Times of Financial Difficulty

iii. More Attractive Sale Price

Types of Dividend Policy:

Steady Dividends at the Present Level Policy Steady Dividends at a Lower Level Policy Steady Dividends at Higher Level Policy Dividends Fluctuating with Earnings Policy Low Regular Dividends Plus Extra Dividend Policy of Eliminating the Dividend Entirely

Classification of Policies :

1. Strict Dividend Policy

2. Liberal Dividend Policy

3. Stable Dividend Policy

i) Constant Dividend Per Share

ii) Stable Dividend Payout Ratio

iii) Constant Dividend Per Share and extra dividend

Significance of Stability of Dividends

a) Investor’s Desire for Current Income

b) Resolution of Investor’s Uncertainty

c) Institutional Investor’s Requirements

d) Raising Additional Finances

e) Routinizing of Dividend Decisions

f) Stability in Mkt. value of Shares

g) Stabilization of national economy

Factors Determining Dividend Policy

1. Financial Needs of the Company

2. Stability of Dividends

3. Legal Requirements

4. Liquidity

5. Growth Prospects

6. Availability of Funds

7. Earnings Stability

8. Control

9. Taxes

10. Investment Opportuni9ties

11. Effects on Earnings Per Share

12. Age of Company

13. Inflation

Theories of Dividend:

I. Theory of Irrelevance of Dividend:

A. Residual Approach

B. Modigliani and Miller Approach (MM Model)

II. Theory of Relevance of Dividend:

A. Walter’s Model

B. Gordon’s Model