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Dividend Policy!



            Dividend is the portion of net income earned by the company paid out to shareholders either cash or share or combination of these. Dividends are paid quarterly, half yearly or annually. Along with equity shareholders dividend is also distributed to the preference shareholders, which is called preference dividend. Generally preference dividend is fixed and constant and distributed before distributing the common shareholders.
            The policy concerned with determining the portion of firm’s earnings to be distributed in the form of cash dividend and the portion of earnings to be retained is called dividend policy. That means the policy of a company on the division of its profit between distribution of dividend to shareholders and retention for its investment is called dividend policy. Any changes in dividend policy have both favorable and unfavorable effect on the firm’s stock price.

Dividend Payment Procedure
The dividend payment procedure of a corporate firm can be stated as follows:
1)     Declaration date: The board of director of the company announces the specified amount of dividend which will be paid to the shareholders. And the date of announcement is called declaration date.
2)     Date of record: Along with the declaration date the board of director specifies the date of record. The date of record is the specific date on which investor must be recorded in the stockholders book for the upcoming dividend.
3)     Ex- Dividend date: The first date on which a stock purchaser is no longer entitled to the recently declared dividend is called ex- dividend date. Generally buyers and sellers of stocks have four business days to settle the transactions prior to the date of record. So the third day before the date of record is ex dividend date.
4)     Payment date: The date on which the company actually pays the declared dividend is called payment date. The payment date is announced by BOD at the time of dividend announcement.

Factors influencing dividend policy

  • Legal requirements 
  • The net profit rule 
  • The capital impairment rule 
  • Insolvency rule 
  • Firms liquidity position 
  • Expected rate of return 
  • Stability of earning 
  • Desire for control 
  • Access to the capital market 
  • Stockholders individual tax situation 
  • Desire of stockholder 
  • Need to repay debt 
  • Restriction in debt control
Dividend Payout Schemes
There are different schemes to pay the dividend. These schemes can be described as follows:
1)     Residual dividend policy: The policy in which company gives first priority on opportunities of investment and only then remaining earnings is distributed to the stockholders as dividend is called residual dividend policy. In this policy the company invests the required amount out of the earnings if it has profitable investment opportunity and the remaining amount is distributed as dividend.
2)     Dividend Stability: Stable dividend policy indicates such policy of dividend which deals with the regularity in dividend payment. It is considered as a desirable policy by the management of most companies as well as most of the shareholders. There are there commonly used dividend stability policies, which are as follows:                             
  • Constant dividend per share:  The dividend policy which prefer to the payment of constant rupees per share as dividend in each period is called constant dividend per share. In this policy company pays constant rupees per share as dividend for one level and if the earning of the company reaches next level, another level of constant dividend will fixed.
  • Constant payout ratio: In this policy the company pays fixed percentage of net earnings every year as dividend. So in this policy the amount of dividend will fluctuate in direct proportion to the earnings.
  • Low constant dividend plus extra: This is combined policy of constant dividend per share and constant payout ratio. In this policy company will provide low constant rupees per share as dividend as well extra dividend when excess earnings are available.

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