Dividend Policy: An Overview

Dividend, within basics implies to the distribution and value of shareholders. And as for dividend policy is what happens to the value of firm as dividend is increased, holding everything else, meaning capital, borrowings, etc., constant. Thus it is a trade-off between retained earnings on one hand and distributing cash or securities on the other.

The dividend policy for any company is governed by the provisions of the Corporations Act, 2001. Section 254 T of the Act prescribes various circumstances in which dividend may be paid to the shareholders. The Act clearly prescribes that a company must not pay dividends unless its assets exceed its liabilities before dividend is declared and the excess is sufficient for payment of dividend.

For instance a company dealing with hummer cars suffered a deficit of $ 50, 000 the same would be carried over to the present financial year as liabilities. Apart from that the most important factor that needs to be considered before deciding whether or not to issue dividend is if the hummer cars were not comprehensively insured and as a result the loss suffered in the destruction of the hummer fleet is quite high as one hummer costs around $ 250,000/- and four hummers or the entire hummer fleet was destroyed by the arsonist this will result in a total loss amounting to $ 10,00,000/-.

Even though the operating profits of the company in the present financial year is of $ 150,000/- but the net decline in the assets remain quite heavy. While deciding whether to pay the dividend to its shareholders or not, the Directors need to ascertain whether or not it would be fair to the shareholders of the company. As for the situation, there has been a steep decline in the assets of the company, the dividend policy of the company for that particular financial year, dividend should not be paid to the shareholders of the companies.            

There are seven different types of dividend policies including Policy of No Immediate Dividend, Stable Dividend Policy, Regular Dividend Policy, Irregular Dividend Policy, Irregular Dividend Policy, Regular Stock Dividend Policy, Regular Dividend Plus Stock Dividend Policy and Liberal Dividend Policy.

There has always been a controversy amongst financial analysts regarding impact of dividends on market price of a company’s shares. Some argue that dividends do not have any impact on such price while others hold a different opinion. However, preponderance of evidence suggests that dividend policies do have a significant effect on the value of the firm’s equity shares in the stock exchange. Having accepted this premise, it will now be appropriate to consider those factors which affect the firm of dividend policy. Other than this the factors affecting the dividend  policy are both internal as well as external.

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