Dividend DecisionsDividend DecisionsMeaning Meaning

Types of Dividend policies Types of Dividend policies Factors influencing dividend policy Factors influencing dividend policy

Forms of dividendForms of dividend

MeaningMeaning

The term dividend refers to that part of The term dividend refers to that part of profits of a company which is profits of a company which is distributed by the company among distributed by the company among its shareholders. its shareholders.

It is the reward of the shareholders for It is the reward of the shareholders for investments made by them in the investments made by them in the shares of the company. shares of the company.

Dividend policy and significance of Dividend policy and significance of dividend policydividend policy

It refers to the policy that the It refers to the policy that the management formulates in regard to management formulates in regard to earnings for distribution as dividendsearnings for distribution as dividends among shareholders. it determines among shareholders. it determines the division of earnings between the division of earnings between payments to shareholders and payments to shareholders and retained earnings. retained earnings.

Significance of dividend policySignificance of dividend policy

The firm has to balance between the The firm has to balance between the growth of the company and the growth of the company and the distribution to the shareholders distribution to the shareholders

It has a critical influence on the It has a critical influence on the value of the firmvalue of the firm

It has to also to strike a balance It has to also to strike a balance between the long term financing between the long term financing decision( company distributing decision( company distributing dividend in the absence of any dividend in the absence of any investment opportunity) and the investment opportunity) and the wealth maximisation wealth maximisation

Contd.....Contd.....

The market price gets affected if The market price gets affected if dividends paid are less.dividends paid are less.

Retained earnings helps the firm to Retained earnings helps the firm to concentrate on the growth, expansion concentrate on the growth, expansion and modernisation of the firmand modernisation of the firm

To sum up, it to a large extent affects To sum up, it to a large extent affects the financial structure, flow of funds, the financial structure, flow of funds, corporate liquidity, stock prices, corporate liquidity, stock prices, growth of the company and investor’s growth of the company and investor’s satisfaction.satisfaction.

Factors influencing the dividend Factors influencing the dividend decisiondecision

Stability of earnings Stability of earnings Financing policy of Financing policy of

the firm the firm Liquidity of funds Liquidity of funds Dividend policy of Dividend policy of

competitive firmscompetitive firms Past dividend rates Past dividend rates Debt obligation Debt obligation Ability to borrow Ability to borrow

Growth needs of the Growth needs of the company company

Profit rates Profit rates Legal requirements Legal requirements Policy of controlPolicy of control Corporate taxation Corporate taxation

policy policy Tax position of Tax position of

shareholders shareholders Effect of trade policyEffect of trade policy Attitude of the Attitude of the

investor group investor group

Stability of dividends/ regularity Stability of dividends/ regularity It is the desirable policy of the management It is the desirable policy of the management

to distribute the shareholders a certain to distribute the shareholders a certain percentage of earnings as a reward for percentage of earnings as a reward for their investment. It may not always relate their investment. It may not always relate to the earnings of the company.to the earnings of the company.

Dividend practices:Dividend practices: Constant dividend per share Constant dividend per share Constant percentage of net earnings Constant percentage of net earnings Small constant dividend per share plus Small constant dividend per share plus

extra earnings extra earnings Dividend as a fixed percentage of market Dividend as a fixed percentage of market

valuevalue

Significance of stability of dividend Significance of stability of dividend

Confidence among shareholders Confidence among shareholders Investors desire for current incomeInvestors desire for current income Institutional investor’s requirement Institutional investor’s requirement Stability in market prices of shares Stability in market prices of shares Raising additional finances Raising additional finances Spreading of ownership of outstanding Spreading of ownership of outstanding

sharesshares Reduces the chances of loss of controlReduces the chances of loss of control Market for debentures and preference Market for debentures and preference

shares.shares.

Forms of DividendForms of Dividend Scrip Dividend-Scrip Dividend- An unusual type of dividend involving the An unusual type of dividend involving the

distribution of promissory notes that call for some type of distribution of promissory notes that call for some type of payment at a future date. payment at a future date.

Bond Dividend-Bond Dividend- A type of liability dividend paid in the A type of liability dividend paid in the dividend payer's bonds . dividend payer's bonds .

Property Dividend-Property Dividend- A stockholder dividend paid in a A stockholder dividend paid in a form other than cash, scrip, or the firm's own stockform other than cash, scrip, or the firm's own stock..

Cash Dividend-Cash Dividend- A A dividend paid in cash to a company's paid in cash to a company's shareholders, normally out of the its current earnings or accumulated shareholders, normally out of the its current earnings or accumulated profitsprofits

Debenture DividendDebenture Dividend

Bonus share or Stock dividends-Bonus share or Stock dividends- A dividend A dividend payment made in the form of additional shares, rather than a payment made in the form of additional shares, rather than a cash payout. cash payout.

Optional Dividend-Optional Dividend- Dividend which the shareholder Dividend which the shareholder can choose to take as either cash or stock. can choose to take as either cash or stock.

Objectives of stock dividend Objectives of stock dividend

Conservation of cash Conservation of cash Lower rate of dividend Lower rate of dividend Financing expansion programmes Financing expansion programmes Transferring the formal ownership of Transferring the formal ownership of

surplus and reserves to the surplus and reserves to the shareholders shareholders

Enhanced prestige Enhanced prestige Widening share market Widening share market True presentation of earning capacityTrue presentation of earning capacity

Merits of Stock dividendMerits of Stock dividend To the companyTo the company1.1. Maintenance of Maintenance of

liquidity position liquidity position 2.2. Satisfaction of Satisfaction of

shareholders shareholders 3.3. Economical issue of Economical issue of

capitalisation capitalisation 4.4. Remedy for under Remedy for under

capitalisation capitalisation 5.5. Enhance prestige Enhance prestige 6.6. Widening the share for Widening the share for

market market 7.7. Finance for expansion Finance for expansion

programmes programmes 8.8. Conservation of Conservation of

controlcontrol

To the shareholdersTo the shareholders1.1. Increase in their Increase in their

equity equity 2.2. Marketability of Marketability of

shares increases shares increases 3.3. Increase in income Increase in income 4.4. Increase demand for Increase demand for

sharesshares

Demerits of stock dividendDemerits of stock dividend

To the companyTo the company

1.1. Increase in the Increase in the capitalisation of the capitalisation of the company company

2.2. It results in more It results in more liability liability

3.3. Denies other investors Denies other investors to shareholders to shareholders

4.4. Management control Management control not diluted it may not diluted it may lead to fraud lead to fraud

To the shareholderTo the shareholder

1.1. It lowers the market It lowers the market value value

2.2. Shareholders prefers Shareholders prefers cash dividend cash dividend

3.3. EPS also fallsEPS also falls