After reading this article you will learn about the Meaning and Types of Dividend Policy. Meaning of Dividend Policy: The term dividend refers to that part of profits of a company which is distributed by the company among its shareholders. It is the reward of the shareholders for investments made by them in the shares of the company.
Company leaders are often the largest shareholders and have the most to gain from a generous dividend policy. Most companies view a dividend policy as an integral part of the corporate strategy.
Management must decide on the dividend amount, timing and various other factors that influence dividend payments. There are three types of dividend policies: Stable Dividend Policy Stable dividend policy is the easiest and most commonly used. Whether earnings are up or down, investors receive a dividend.
The goal is to align the dividend policy with the long-term growth of the company rather than with quarterly earnings volatility. Constant Dividend Policy The primary drawback of the stable dividend policy is that investors may not see a dividend increase in boom years.
In this way, investors experience the full volatility of company earnings. If earnings are up, investors get a larger dividend; if earnings are down, investors may not receive a dividend. The primary drawback to the method is the volatility of earnings and dividends. It is difficult to plan financially when dividend income is highly volatile.
Residual Dividend Policy Residual dividend policy is also highly volatile, but some investors see it as the only acceptable dividend policy. This approach is volatile, but it makes the most sense in terms of business operations.
Investors do not want to invest in a company that justifies its increased debt with the need to pay dividends.According to this hypothesis, the only constraint to the company’s market value is the company’s investment policy, not the company’s dividends policy followed.
This is because the investment policy is responsible for future profits (Miller and Modigliani ). kyoshino/Getty Images Companies that earn a profit can do one of three things: pay that profit out to shareholders, reinvest it in the business through expansion, debt reduction or share repurchases, or urbanagricultureinitiative.com a portion of the profit is paid out to shareholders, the payment is known as a dividend.
Dividend policies are one of the important decisions taken by the company. Several factors affect the payout policy of the company, which includes various types of dividends model as well as repurchasing shares. Dividend policies can be framed as per the requirements of the companies.
Dividend policy is the set of guidelines a company uses to decide how much of its earnings it will pay out to shareholders. Some evidence suggests that investors are not concerned with a company's dividend policy since they can sell a portion of their portfolio of equities if they want cash.
The advocates' researchers believe that companies should follow residuals dividend policy while the opponents' researchers' divided into two divisions, the first believes that there is a positive relationship between the dividend policy and the company market value, others said that this relationship is negative.
The various types of dividend policies are discussed as follows: (a) Regular Dividend Policy: Payment of dividend at the usual rate is termed as regular dividend.