- Dividend Policy
- Objectives of Dividend Policy
- Types of Dividend Policy
When the corporate makes a profit, it will do 2 things thereupon profit i.e. either the corporate will retain that profit with it for a few future purposes or it will distribute that profit to the shareholders and therefore the method of distribution of profits to the shareholders is termed the dividend pay-out and therefore the policy below that the corporation distributes the dividend to its shareholders is termed the dividend policy.
It is created by the board of administrators of the corporate. Because the call of distribution of profits within the variety of dividends is undertaken by the board, it’s the board of administrators of the corporate who that decides the content of the dividend policy considering various factors like growth and future assignments and comes. It contains info on the number of dividends to be distributed in conjunction with the frequency of distribution of dividends. The worth of the enterprise is tormented by the dividend policy.
Objectives of Dividend Policy
- The most vital objective of dividend policy is the improvement of the money health of the corporate. This objective conjointly takes into thought the shareowner’s wealth because the shareholder of the corporate plays a vital role in the company’s growth.
- The distribution of dividends will increase the money outflow of the corporate and therefore less money is accessible to the corporate once the distribution of dividends. If within the future, the corporate needs to accumulate any new project or if it needs to expand its business, with the obtainable very little money, it cannot opt for a brand new acquisition or growth. During this case, it’s to require the assistance of external funding which can lead to the additional price of interest for the corporate. Hence, the thought of the future comes is additionally one of the vital objectives of dividend policy.
- The rate of dividend distribution ought to be consistent over the years as a result of giant fluctuations within the rate that affect the market value of the share. Therefore the consistency within the rate of distribution of dividends is additionally one among the objectives of dividend policy.
- If the corporate takes the assistance of external finances, it puts doubts on the money position of the corporate within the eyes of shareholders. Hence, shareholders will move from the corporate and it may end up within the dilution of existing shareholders of the corporate. Hence, the dividend policy ought to be conservative so that the present shareholders don’t get hampered because of the policy.
Types of Dividend Policy
The following kinds are:
- Fixed/regular Dividend Policy: In a mounted or regular dividend policy, the dividend is paid by the corporate each year regardless of the creation of profits or losses. Shareholders get the mounted quantity of dividends each year whether or not the corporate creates profit or loss. If the corporate earns additional profits than traditional, it will transfer the number ignored once the distribution of dividends to the shareholders within the preserved earnings account. And if the corporate makes losses, in this case conjointly it’s to distribute the mounted quantity of dividend to the shareholders.
- Stable Dividend Policy: In a stable dividend policy, the share of a dividend of profits to be paid to shareholders is mounted rather than the number of dividends.
For example, the corporate set out that it’ll pay five-hitter of profits because of the dividend pay-out to the shareholders regardless of the number of profits it’s attained. During this kind, shareholders face a ton of uncertainty as they don’t have any plan of what quantity of dividends they’re planning to receive for the year.
- Irregular Dividend Policy: During this kind of dividend policy, there’s no such certainty of receipt of dividend to the shareholders of the corporate. The corporate is below no obligation to share the number or share of profits with the shareholders. If it’s attained an oversized quantity of profit in any specific year, it will distribute any quantity of profits as a dividend. In this case, the distribution of dividends alone depends on the discretion of the corporate. For the shareholders, it is often extremely risky to speculate during a company as there’s the risk of not receiving any dividend in any year.
- No Dividend Policy: several businesses don’t the least bit distribute any quantity of their profit because of the dividend. This is often as a result of, regardless of the profits it’s attained, its transfers that quantity in preserved earnings account to be used for growth or acquisition of future comes. This makes the corporate grow quickly and conjointly the worth of its shares get will increase.