DIVIDEND

POLICY
Meaning:

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) Indication of Higher Future Profits
ii) Future Dividends may Increase
iii) High Psychological Value
iv) Retains Proportional Ownership for
shareholders

B. To Company :
 Conserves Cash
 Only Means to Pay Dividend in Times of
Financial Difficulty
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. Investment Opportunities
10. Effects on Earnings Per Share
11. Age of Company
12. 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