Dividend Policy

The term dividend refers to that portion of companys net earnings that are paid out to the equity shareholders. Dividend Policy; the policy of a firm decides the portion of earnings which are paid as a dividends ordinary shareholders & the portion is that ploughed back in the firm for investment purpose. Types of Dividend Dividends may take different forms as follows: A) Stock Dividend: It is a form of dividend in which the surplus of the company is transffered to the capital account and shareholders are given the dividend form of shares rather than cash. B) Cash dividend: It refers to the payment of dividend in cash. It is reduces cash and retained earnings of the company. C) Property dividend D) Scrip dividend E) Bond dividend Types of dividend policies Stable dividend means payment of a certain minimum amount of regularly. There are three classifications A) Constant Dividend per share: A company that follows this policy will pay a fixed amount per share. This type of dividend policy is more suitable for the company whose earnings are stable over a number of years. B) Constant payout ratio: the ratio of dividend to earnings is known as payout ratio. Divided per share is divided by earnings per share to get dividend payout ratio it is known as constant percentage of net earnings. In this policy a fixed percentage of earning is paid out as dividends in each year. C) Stable rupee dividend plus extra dividend: this policy management fixes the minimum dividend per share to reduce the possibility of net paying dividend. This type of policies more suitable to the company having minimum earnings and over the minimum, the earnings may fluctuate. Important Consideration Factors: Dividend policy means formation of policy by company regarding the payments of dividend to Share holders from profit. Its a determined ratio between ratio and returned earning. The main

aim of dividend policy is to maintain the balance between current dividend and future growth, which maximizes the price of firms share. Dividend payout ratio of firm should be determined by two objective. 1. Maximization of share holders wealth 2. Providing sufficient funds for growth. Nature of earning Nature of business play important role in dividend policy, every industry having stability of earning, may formulate stable or a more consistent dividend policy rather than other dividend policy. Age of company The age of company directory affecting on the distribution of profit as a dividend. It minces a newly started company adopt rigid dividend policy because of highly retain earning and growth. Where old company adopt consistent dividend policy. Liquidity position of company It depends on investment and financial decision of firm. Since availability of cash and sound financial position of company are important factors in taking dividend decision Equity share holder preference for current income. When company decide dividend payment that time to give preference to share holders for current dividend or capital gains. But it depends on their economy status and tax liability. As per equity share holder preference in current dividend firm adopt a liberal dividend policy, on other hand if share holders prefer capital gain, firm retain earning. Requirement of institutional investor. The firm adopts a stable dividend policy to attract institutional investor. Because they purchase large number of shares to hold o retain for longer time. It helps wealth maximization of company Legal rules. It is framework within which dividend policy formulated 1. Capital impairment rule. : Dividend can be considered to pay from current year and past year earnings which reflect in earned surplus. This rule protects creditors by providing sufficient equity based.

2. Net profits :