DIVIDEND POLICY

Introduction:

The primary objective of financial management is to maximize the market value of the firm. For which we need to understand the relationship between dividend policy and market price.

Dividend policy refers to the policy chalked out by firms regarding the amount they would pay to their shareholder as dividend. Once firm make profits, they have to decide on what to do with their profits. They have two options

1. They can retain their policy.
2. they can pay these profits in the form of dividend.

The important aspect of dividend policy is to determine the amount of earnings to be distributed to shareholders and the amount to be retained in the firm. Retained earnings are most significant internal sources of financing growth of the firm.

Dividend :

It refers to ‘part of profit’ which is distributed among the shareholder. It can be in form cash or stock. Firms are not required to pay dividends. The firm that offer dividend are most often firms that have progressed beyond growth phase and no longer benefit sufficiently by the reinvesting their profits.

Types of dividend

(i)Regular dividend :

paid annually, proposed by BOD and approved by shareholders in general meeting. Generally paid in cash as a percentage of paid up capital say 10% or 15% of the capital.

(ii)Interim dividend:

Paid when firm earned heavy profits or abnormal profits, such payment of dividend in between two annual general meeting before finalizing the accounts

(iii)Stock dividend :

Its in the form if issue of bonus shares to the equality share holders in lieu or addition to the cash dividend. It is permanent capitalization of earnings, it increases capital and reduces reserves and surplus. No impact of wealth of the shareholder. Shareholder who receives more share of the firms. It resembles a slice of cake. i.e., dividend the slice in to two or three pieces but overall size remains the same.

(iv)Bond dividend:

In a rare instance dividend paid in the form of bond for along period. Firm generally pays interest on theses bonds and repays the bonds on maturity.

(v)Property dividend :

sometime dividend paid in the form of asset instead of payment of dividend in cash. The distribution made whenever the asset no longer required in investment.

Conclusion:

The objective of dividend policy should be maximize shareholder’s return so that the value of his investment is maximized. Shareholders consists of two components : dividends and capital gains. Dividend policy adopted by the firm is based on these two options

• If the firm pays dividends, it affects the cash flow position of the firm but earns goodwill among the investor who therefore, may be willing to provide additional funds for the financing of investment plans.

On the other hand profits which are not distributed as dividend become an easily available sources of funds at no explicit cost. Also pouching back profits the firm may lose the goodwill and confidence of investor. Hence fin mgr. has to strike a balance between dividend and retained earnings.

Click here for government certification in Accounting, Banking & Finance