Types of dividend policy in financial management. Meaning and Types of Dividend Policy 2022-10-13
Types of dividend policy in financial management Rating:
Dividend policy refers to the process by which a company decides how much of its profits to distribute to shareholders in the form of dividends. This decision is an important aspect of financial management, as it can have a significant impact on the value of the company's stock and the return that shareholders receive on their investment. There are several different types of dividend policy that a company can adopt, and the best choice will depend on the company's specific financial situation and goals.
One type of dividend policy is the "regular dividend" policy, in which a company pays a consistent amount of dividends to shareholders on a regular basis, such as quarterly or annually. This type of policy is often adopted by mature, stable companies with a long track record of steady profits. It allows shareholders to predict the amount of dividends they will receive and can provide a steady stream of income for investors.
Another type of dividend policy is the "variable dividend" policy, in which the amount of dividends paid to shareholders varies from period to period depending on the company's financial performance. This type of policy is often adopted by companies that are in a growth phase and need to retain a significant portion of their profits for reinvestment in order to fund their expansion. While this can be a riskier strategy for shareholders, as the amount of dividends they receive may be unpredictable, it can also be more rewarding in the long run if the company is successful in its growth efforts.
A third type of dividend policy is the "no dividend" policy, in which a company does not pay any dividends to shareholders. This is often the case for companies that are in a high-risk, high-growth industry and need to retain all of their profits in order to fund their expansion and development. While this can be frustrating for shareholders who are looking for a return on their investment, it can also be a smart strategic decision for the company if it is successful in its growth efforts.
In conclusion, there are several different types of dividend policy that a company can adopt in financial management, including regular dividends, variable dividends, and no dividends. The best choice will depend on the company's specific financial situation and goals, and may involve a combination of these different approaches. By carefully considering its dividend policy, a company can maximize the value of its stock and provide a fair return to its shareholders.
Forms of Dividend Policy
Reduces the chances of Loss of control- Because of the spreading of ownership for outstanding shares among the large number of small investors the chances of Loss of control by the present management over the company are reduced. This policy is usually pursued in the following circumstances: i When the firm is a new and rapidly growing and it needs tidy amount of funds to finance its expansion programmes. Large extra dividends are paid out during cyclical highs when companies generate more cash than needed for growth and are then curtailed during cyclical lows when cash is required internally. Stable Dividend Policy: As the name of the policy suggests, stable dividend policy 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. See also Is It Better To Take Dividends Or Reinvest? The ratio of the actual distribution or dividend, and the total distributable profits, is called dividend payout ratio. It changes from year to year according to changes in earnings level.
In this case, the distribution of dividend solely depends on the discretion of the company. This type of policy is suitable to the small investors, retired persons and others. Shareholders are certain of their current dividend income can plan their financial activities accordingly. A firm paying regular dividends would continue with its pay out ratio. Companies buy back approximately 80% of the shares that they initially announce. Shareholders gets the fixed amount of dividend every year whether the company making profit or loss. Because their interest payments won't change, those who own bonds don't care about a particular company's dividend policy.
Bond Dividend Bond dividend is also known as script dividend. In the rapid growth and maturity phases, more information becomes available as more equity analysts follow the stock once the company goes public and share trading volume increases. Trusts Trust beneficiaries can be taxed either like investors inside a tax-sheltered account or outside a tax-sheltered account so the preference for dividends or capital gains varies. They attract investors with a longer horizon and larger disposable funds since they are compensated by steady cash flows. Extra dividends are declared only in the year in which earnings exceed annual dividend requirement by some given amount. Bonus shares Bonus shares refer to shares in the company are distributed to shareholders at no cost. A company may also decide not to pay any dividends at all or pay all of it in the form of dividends.
What Are the 4 Types of Dividend Policy? (Explained)
Such companies create a reserve fund which ensures that it is able to pay the same dividend in those years too when it fails to achieve an adequate level of earnings. If the dividend is too high, they would use the money to buy more shares. Stock splits require no journal entries but the higher number of shares is noted in the financial statements. As discussed, not fulfilling share repurchase obligations also has little negative effect on the share price as compared to reducing a regular dividend. It is rather the starting point of the dividend policy.
Security lending allows investors to earn fee income on securities in their portfolios that they lend. The size of the spread varies with the liquidity of the market and is a major transaction cost for investors. This policy is pursued by those companies whose income considerably fluctuates from year to year. If a company does not invest in positive cash flow projects, it cannot earn profit. The extra dividend payment will be made as circumstances permit. These plans are not binding so management can cancel them at any time or only buy back a portion of the shares. Hence a dividend policy will have to be designed in the light of the factors affecting a particular company.
Preferred share agreements also stipulate that companies cannot pay common share dividends if their preferred share dividends are in arrears. The transaction is very safe for investors as it is secured by collateral pledged by the investment banker who also compensates the security lender for any missed dividends or rights distributions. Shareholders get higher dividends if the company has higher earnings and vice versa. It is a risky dividend policy for many investors. As the decision of distribution of profits in the form of dividends is undertaken by the board, it is the board of directors of the company who decides the content of the dividend policy considering different factors like growth and future assignments and projects. For example, if a company decides that 50% of profit after interest and tax would be paid to equity shareholders as dividend, it is a stable percentage dividend policy. In this article, we will go through the approaches of dividend policy which are useful for commerce and management students.
To benefit such investors, the companies should pay regular dividends. Types of Dividend Policy : The various types of dividend policies are discussed as follows: a Regular Dividend Policy: ADVERTISEMENTS: Payment of dividend at the usual rate is termed as regular dividend. Generally, investors experience significant negative abnormal returns after a reverse split. In the subsequent year when the firm will have no or limited investment opportunities to seize, the management may distribute larger share of earnings which would otherwise have remained unutilized. For instance, people used to drink liquor both in boom as well as in recession.
financial management: Approaches to Dividend Policy
This trend started in the U. This course of action would be necessary to keep share prices within limits. When an upswing in EPS is expected to be maintained for a reasonably long time, the DPS is scaled up. Shares have continued to trade in the same average price range under CAD 100 over decades despite considerable growth in the consumer price index and the value of corporate equity which should have increased average share prices. The result is that CTC is paying out over 100% of its normalized earnings if both the regular cash dividends and share buybacks are considered.