TOPIC:

DIVIDEND POLICY

DIVIDEND POLICY:

Once a company makes a profit,  management must decide on what

to do with those profits. They could continue to retain the profits within the company, or they
could pay out the profits to the owners of the firm in the form of dividends.
Once the company decides on whether to pay dividends they may establish a somewhat
permanent dividend policy, which may in turn impact on investors and perceptions of the
company in the financial markets. What they decide depends on the situation of the company
now and in the future. It also depends on the preferences of investors and potential investors.
DIVIDENDS:

Dividends are payments made to stockholders from a firm's earnings, whether those
earnings were generated in the current period or in previous periods.

DIVIDEND MAY EFFECT CAPITAL STRUCTURE:

 Retaining earnings increases common equity relative to debt.

 Financing with retained earnings is cheaper than issuing new common equity.
DIVIDEND POLICY AND STOCK VALUE:

There are various theories that try to explain the relationship of a firm's dividend policy and
common stock value.

DIVIDEND IRRELEVENCE THEORY:

This theory purports that a firm's dividend policy has no effect on either its value or its cost of
capital. Investors value dividends and capital gains equally.

OPTIMAL DIVIDEND THEORY:

Proponents believe that there is a dividend policy that strikes a balance between current
dividends and future growth that maximizes the firm's stock price.

DIVIDEND REVENUE THEORY:

The value of a firm is affected by its dividend policy. The optimal dividend policy is the one that
maximizes the firm's value. 
INVESTOR AND DIVIDEND POLICY: 

INFORMATION CONTENTOR AND SIGNALING:

Signaling hypothesis says that investors regard dividend changes as signals of management's
earnings forecasts.
CLIETELE EFFECT:
The clientele effect is the tendency of a firm to attract the type of investor who likes its dividend
policy.
FREE CASH FLOW HYPOTHISES:
All else equal, firms that pay dividends from cash flows that cannot be reinvested in positive net
present value projects (free cash flows), have higher values than firms that retain free cash flows.

DIVIDEND AND RETAIND EARNING DECIEAN:

There are various constraints that may impact on a firm's decision to pay out earnings in the form
of dividends.

COSIDERATION:
 Cash flow constraints
 Contractual constraints
 Legal constraints
 Tax considerations
 Return considerations

TYPES AND DIVIDEND POLICY:

POLICY TYPES:

 Constant Dollar Dividend Policy:

A stable dollar dividend policy is a policy based on the payment of a fixed-dollar
dividend each period. ... A constant payout ratio policy is a policy of paying a fixed
percentage of a firm's earnings as dividends in each period. Such a policy is likely to result
in wildly fluctuating dividends.
 Constant Payout Ratio:
The dividend payout ratio can be calculated as the yearly dividend per share over
the earnings per share, or equivalently, the dividends divided by net income (as shown
below):
 Regular with Extras:
Some companies follow a policy of paying constant low dividend per share plus an extra
dividend in the years of high profits. Such a policy is most suitable to the firm having
fluctuating earnings from year to year.
PAYMENT PROCEDURES:
DECLARATION DATE
The Declaration Date is the date on which a firm's board of directors issues a statement
declaring a dividend.
HOLIDER-OF-RECORD DATE
This is the date on which the company opens the ownership books to determine who will
receive the dividend.
EX-DIVIDEND DATE
This is the date on which the right to the next dividend no longer accompanies a stock,
usually two business days prior to the holder-of-record date.
DIVIDEND REINVESTMENT PLAN: (DRP)
A DRIP (Dividend Reinvestment Plan) is a plan that enables a stockholder to automatically
reinvest dividends received back into the stock of the paying firm. The plan may either
involve the firm repurchasing existing shares or it may involve newly issued shares.
STOCK DIVIDEND AND STOCK SPLITE:
STOCK DIVIDEND:
Here, the firm issues new shares in lieu of paying a cash dividend. If 10%, shareholders
would get 10 shares for each 100 shares of stock owned.
STOCK SPLITE:
When the board votes a stock split, the firm increases the number of shares outstanding,
say 2:1.