09 Nov 2015Dividend Policy
An investor cannot evaluate any investment, whether it’s a stock, bond, rental property, collectible or option without a return. In case of stock, dividend is a form of return to the stockholders of the company. Dividend is one of the important ways with which companies communicate its financial position and the shareholder value too. In this article, we’ll cover the types of dividends policy and factors affecting them.
Dividend policy of a company sets the guidelines to be followed while deciding the amount of dividend to be paid out to the shareholders. The company needs to adhere by the rules set out in the dividend policy while distributing dividend.
There are basically 4 types of dividend policies.
Regular Dividends Policy – is a policy in which company pays dividend at a usual rate. Generally retired individual or weaker section of the society prefers this policy. To implement this policy company has to make sure that earnings should be stabilized first.
Stable Dividend Policy – This policy assures dividend to the stockholder if company has positive earnings. Below mentioned table summarizes the different type of stable dividend policy and their effect on investors and management.
Irregular Dividends – When the company does not have regular earnings or lack of liquid funds, it pays dividends on irregular basis.
No Dividends – Company does not pay dividends in case it has requirement of funds for future growth.
As it quite evident that dividend policy holds a great importance in company’s growth therefore prior to framing a dividend policy, company should consider the following factors which impact the dividend policy.
To make shareholders happy and company grow, it should decide the dividend policy and timing diligently. As there is no single optimal dividend policy that fits all the firms, companies should judiciously weigh the company specific and market related factors before formulating the dividend policy. It should also weigh the advantages and the disadvantages of the dividends before framing a dividend policy.
Also Read: Importance Of Compounding In Valuation