DIVIDEND DECISION

The dividend is that portion of the profit that is distributed to shareholders. Involved

  • How much of the profit earned by the company (after paying tax) is to be distributed to the shareholders
  • How much of it should be retained in the business for meeting the investment requirements

​​​​​​​Explain Factors Affecting The Dividend Decision.

  1. Earnings: Dividends are paid out of the current and past earnings. Therefore, earnings are high then only the company can pay the dividend
  2. Stability of Earnings:  Company having stable earnings is in a position to declare higher dividends than a company having unstable earnings.
  3. Stability of Dividends: some companies may pay a fixed rate of dividend irrespective of profit like the company may pay a dividend of Rs 3 per share for every share
  4. Growth Opportunities: Companies having good growth opportunities keep more money out of their earnings so as to invest in future projects. The dividend in growth companies is, therefore, smaller than that in the non–growth companies.
  5. Cash Flow Position: Dividends involve an outflow of cash. A company may be profitable but short on cash. The availability of enough cash in the company is necessary for the declaration of dividends by it.
  6. Shareholder Preference: If the shareholders, in general, want that at least a certain amount is paid as a dividend, the companies are likely to declare the same or vice -versa
  7. Taxation Policy. If the tax on dividends is higher it would be better to pay less by way of dividends. As compared to this, higher dividends may be declared if tax rates are relatively lower.
  8. Stock Market Reaction: Investors, in general, view an increase in dividends as good news and stock prices react positively to it. Similarly, a decrease in dividends may have a negative impact on the share prices in the stock market.
  9. Access to Capital Market: Large and reputed companies have easy access to the capital market and depend less on retained earnings growth to pay higher dividends.
  10. Legal Constraints: Certain provisions of the Company’s Act place restrictions on payouts as dividends. Such provisions must be adhered to while declaring the dividends.
  11.  Contractual Constraints: While granting loans to a company, sometimes the lender may impose certain restrictions on the payment of dividends in the future. The companies are required to ensure that the dividends do not violate the terms of the loan agreement in this regard

Factors Affecting Dividend Decision: