Scribd
Upload
81 views2 pages

Shareholder Expectations in Dividend Policy

Why the dividend policy depends on the shareholders' expectations and what are the different types of dividend policies.

Uploaded by

ketchupisjuice
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
81 views2 pages

Shareholder Expectations in Dividend Policy

Why the dividend policy depends on the shareholders' expectations and what are the different types of dividend policies.

Uploaded by

ketchupisjuice
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd

Dividend policy depends upon the

shareholders’ expectations

A dividend is a distribution of profits by a corporation to its shareholders. When a


corporation earns a profit or surplus, it is able to pay a proportion of the profit as a dividend
to shareholders. Any amount not distributed is taken to be re-invested in the business. A
company’s dividend policy dictates the amount of dividends paid out by the company to its
shareholders and the frequency with which the dividends are paid out. A sound dividend
policy is a long term policy which aims at the maximization of shareholders’ wealth.
Therefore, dividend policy is one of the most important information expected by the
shareholders, as it is a tool for the managers to convey signals about the prospects of the
company to the shareholders. A clearly articulated dividend policy would also hence establish
some expectations. Shareholders know when and under what circumstances the company
will pay dividends, and perhaps even how much. There are various other factors which
impact the dividend policy of a company such as the ownership structure, extent of share
distribution, liquidity, legal rules, etc. Another important factor which influences the policy is:
Different Shareholder’s Expectations, i.e. the diversity of the shareholders’ type, which a
company possesses. There will be different expectations in a different group of shareholders.
There are investors who are interested in capital gains while some want a steady flow of
dividends. The reasons are age factor, risk appetite, financial needs, etc. of the investors. A
retired elderly investor may prefer for a steady source of income whereas a young investor
having a higher risk appetite may be interested in holding a stock for long term in the
expectations of high capital gains. Institutional investors and retail investors too differ when
an investing into dividend yielding stocks and stocks yielding capital gains. The company
needs to clearly understand the different expectations and formulate a successful dividend
policy. For example, psychologically, cash dividend might give more satisfaction to a
shareholder in comparison to capital appreciation.

Types of Dividend Policies

The company can choose to follow a Regular Dividend Policy, a Stable Dividend Policy, an
Irregular Dividend Policy or a No Dividend Policy.

Under a Stable Dividend Policy, the company focuses on regularity in paying some dividend
even though the amount of dividend may vary every year and may not be associated with
earnings of the company. In other words, stable dividend means that a certain minimum
amount of dividend is paid regularly. It may also mean that dividend is paid regularly by the
company, but the amount or rate of dividend is not fixed. The stable dividend may take the
following forms.

Constant Dividend per Share or Dividend Rate


Under this policy, the company pays a fixed amount of dividend on every share irrespective
of the level of earning year after year. In order to ensure consistency in payment of
dividends, reserve fund is created to pay fixed amount of dividend in the year when the
earning of the company is not enough. It is suitable for the firms having stable earning. Even
though dividend is constant every year as per this policy, it does not mean that the rate of
dividend will never be increased. Depending on the level of earning of the company, the rate
may change.

Constant Payout Ratio or Constant Percentage


According to this policy, the percentage of earnings paid out as dividends remain constant
irrespective of the level of earnings. Thus, as earnings of a company fluctuate, dividends paid
by it also fluctuate accordingly in proportion to the earnings of the company. Therefore, such
a dividend policy comes with the potential to generate very volatile dividend payouts.

Constant Dividend per Share plus Extra Dividend


A policy of paying low regular dividend plus a year-end extra in good years is a compromise
between the constant dividend per share policy and constant payout policy. According to this
policy, a company pays a low rate of dividend per share to reduce the chances of not paying
dividend. In other words, dividends in rupee terms mostly remain constant irrespective of the
level of earnings and in the period when company performs exceptionally well the
management pays extra dividend.

You might also like