Related What is Dividend Policy? The profit which is not distributed is known as retained earnings. Therefore, it is the reward of the shareholders for the investment made by them in the shares of the company. Types of Dividends Types of Dividends policy pdf 1.
This article throws light upon the top thirteen determinants of dividend policy. Magnitude and Trend of Earnings 3. Desire and Type of Shareholders 4. Nature of Industry 5. Age of the Company 6.
Future Financial Dividend policy determinants 7. Control Objectives and Others. Legal provisions relating to dividends as laid down in sections 93,A, and of the Companies Act, are significant because they lay down a framework within which dividend policy is formulated.
These provisions require that dividend can be paid only out of current profits or past profits after providing for depreciation or out of the moneys provided by Government for the payment of dividends in pursuance of a guarantee given by the Government.
Companies Act, further, provides that dividends cannot be paid out of capital, because it will amount to reduction of capital adversely affecting the security of its creditors.
Magnitude and Trend of Earnings: The amount and trend of earnings is an important aspect of dividend policy. It is rather the starting point of the dividend policy. Desire and Type of Shareholders: Although, legally, the discretion as to whether to declare dividend or not has been left with the Board of Directors, the directors should give the importance to the desires of shareholders in the declaration of dividends as they are the representatives of shareholders.
Desires of shareholders for dividends depend upon their economic status. Investors, such as retired persons, widows and other economically weaker persons view dividends as a source of funds to meet their day-to-day living expenses.
To benefit such investors, the companies should pay regular dividends. On the other hand, a wealthy investor in a high income tax bracket may not benefit by high current dividend incomes.
Such an investor may be interested in lower current dividends and high capital gains. It is difficult to reconcile these conflicting interests of the different type of shareholders, but a company should adopt its dividend policy after taking into consideration the interests of its various groups of shareholders.
Nature of industry to which the company is engaged also considerably affects the dividend policy. Certain industries have a comparatively steady and stable demand irrespective of the prevailing economic conditions.
For instance, people used to drink liquor both in boom as well as in recession. Such firms expect regular earnings and hence can follow a consistent dividend policy.Factors Affecting the Dividend Policy.
Many investors tend to flock to dividend-paying companies because they provide a source of income. But there is a lot of work done on the company’s end to determine how much to pay shareholders and what changes to make to the dividend policy.
More importantly, however, some of the determinants of dividend policy are different for regulated and unregulated firms.
Specifically, the percentage of common stock held by insiders, and expected future growth rate, do not play a key role in a regulated firm ' s payout ratio. The policy that a firm uses to decide, how much portion of the firm’s net earnings or profit after tax must be paid to the shareholders in the form of dividends to keep them happy is known as Dividend Policy..
Determinants of Dividend Policy. Some determinants of dividend policy are discussed below: i. Dividend Pay-out Ratio: Dividend pay-out ratio is calculated by dividing the dividend per share by earnings per share. It indicates the proportion of earnings distributed as dividend.
Lower dividend pay-out ratio indicates conservative dividend policy. Please do send us a request for Determinants of Dividend Policy tutoring and experience the quality yourself. Online Determinants of Dividend Policy Help: If you are stuck with a Determinants of Dividend Policy Homework problem and need help, we have excellent .
The dividend policy determinants have been well documented and researched in developed countries (US, Canada, UK, Germany, France and Japan) USA and European markets (Lintner , Modigliani and Miller , Pettit , Black &.