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Dividend Policy: The Policy A Company Uses To Decide How Much It Will Pay Out To Shareholders in Dividends

There are several types of dividend policies that a company can establish: (1) A stable dividend policy, where a company pays regular dividends at a fixed rate to maintain prestige, even if profits fluctuate. (2) A regular dividend plus extra dividend policy, where a company pays regular dividends and extra dividends in years with higher than normal earnings. (3) A regular dividend plus stock dividend policy, where a company pays part of the dividend in cash and part in company shares, to maintain regular dividends while retaining some profits for expansion.

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109 views10 pages

Dividend Policy: The Policy A Company Uses To Decide How Much It Will Pay Out To Shareholders in Dividends

There are several types of dividend policies that a company can establish: (1) A stable dividend policy, where a company pays regular dividends at a fixed rate to maintain prestige, even if profits fluctuate. (2) A regular dividend plus extra dividend policy, where a company pays regular dividends and extra dividends in years with higher than normal earnings. (3) A regular dividend plus stock dividend policy, where a company pays part of the dividend in cash and part in company shares, to maintain regular dividends while retaining some profits for expansion.

Uploaded by

UmairIUGC
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© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd

Dividend Policy

The policy a company uses to decide how much it will pay out to shareholders in dividends

Dividend Policy
Once a company makes a profit, they must decide on what to do with those profits. They could continue to retain the profits within the company, or they could pay out the profits to the owners of the firm in the form of dividends. they may establish a somewhat permanent dividend policy, which may in turn impact on investors and perceptions of the company in the financial markets.

Types of Dividend Policies


The following are various types of dividend policies (1) Policy of No Immediate Dividend (2) Stable Dividend Policy. (3) Regular Dividend plus Extra Dividend Policy. (4) Irregular Dividend Policy. (5) Regular Stock Dividend Policy. (6) Regular Dividend plus Stock Dividend Policy. (7) Liberal Dividend Policy.

(1) Policy of No Immediate Dividend


Generally, management follows a policy of paying no immediate dividend in the beginning of its life, as it requires funds for growth and expansion.

(2) Stable Dividend Policy.


When a company pays dividend regularly at a fixed rate, and maintains it for a considerably long time even though the profits may fluctuate, it is said to follow regular or stable dividend policy. Thus stable dividend policy means a policy of paying a minimum amount of dividend every year regularly. It raises the prestige of the company in the eyes of the investors.

3) Regular Dividend plus Extra Dividend Policy.


A firm paying regular dividends would continue with its pay out ratio. But when the earnings exceed the normal level, the directors would pay extra dividend in addition to the regular dividend. it would be named 'Extra dividend', as it should not give an impression that the company has enhanced rate of regular dividend.

(4) Irregular Dividend Policy.


When the firm does not pay out fixed dividend regularly, it is irregular dividend policy. It changes from year to year according to changes in earnings level. This policy is followed by firms having unstable earnings, particularly engaged in luxury goods.

5) Regular Stock Dividend Policy.


When a firm pays dividend in the form of shares instead of cash regularly for some years continuously. When a company is short of cash or is facing liquidity crunch, because a large part of its earnings are blocked in high level of receivables or when the company is need of cash for its modernization and expansion program, it follows this policy.

(6) Regular Dividend plus Stock Dividend Policy.


A firm may pay certain amount of dividend in cash and some dividend is paid in the form of shares (stock). This policy is justified when (1) The company wants to maintain its policy of regular dividend and yet (2) It wants to retain some part of its divisible profit with it for expansion. (3) It wants to give benefit of its earnings to shareholders but has not enough liquidity to give full dividend in cash.

(7) Liberal Dividend Policy.


It is a policy of distributing a major part of its earnings to its shareholders as dividend and retains a minimum amount as retained earnings. The ratio of dividend distribution is very large as compared to retained earnings.

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