Dividend Policy
Dividend policy refers to the framework a company uses to determine how much of its earnings it will distribute to shareholders in the form of dividends. This policy is influenced by various factors, including the company's financial position, growth prospects, and the preferences of its shareholders. A well-defined dividend policy can help maintain investor confidence and attract new investors.
6 Key excerpts on "Dividend Policy"
eBook - ePub- Brümmer LM, Hall JH, Du Toit E(Authors)
- 2017(Publication Date)
- Van Schaik Publishers(Publisher)
...241 14 Dividend Policy Learning outcomes After studying this chapter, you should understand the relationship between dividends and retained earnings be aware of the difference between dividends and earnings per share know what is meant by Dividend Policy be aware of the factors affecting Dividend Policy understand the aim and purpose of Dividend Policy know the procedures by which dividends are paid fully understand the effects that Dividend Policy can have on share value and owners’ wealth. Introduction An important aspect to consider when investigating an organisation’s financial affairs is the Dividend Policy. It was stated earlier that dividends are paid out in accordance with a previously devised policy and not in accordance with some haphazard payment plan. Furthermore, prospective investors and existing shareholders are keen to know on what basis dividends are to be paid, since these represent their expected rewards. If this information is not available, few people would be prepared to risk their funds in a project which has a dubious system of rewarding its owners. Furthermore, there will always be a higher demand for shares in an organisation which has a reputation for regular and consistent payments of dividends, especially during times of economic recession. As a result, the value of such shares will increase. For these reasons, Dividend Policy plays an important role in the financial affairs of an organisation and in promoting shareholders’ wealth. In this chapter, we shall consider some of the major aspects of Dividend Policy. There are also a number of theories concerning Dividend Policy, but these are beyond the scope of this book. Note that Dividend Policy refers only to ordinary shares and to ordinary shareholders – the true owners of the organisation. Dividend Policy as such does not refer to preference shares or to preference shareholders...
eBook - ePubPrivate Equity
Transforming Public Stock to Create Value
- Harold Bierman(Author)
- 2011(Publication Date)
- Wiley(Publisher)
...By declaring a dividend, the board of directors is not only turning over some of the assets of the corporation to its stockholders, but it may be influencing the expectations stockholders have about the future dividends they can expect from the corporation. If expectations are affected, the dividend decision and the underlying Dividend Policy will have a short term impact on the value the market places on the common stock of the corporation. Many financial experts believe that a highly stable but growing dividend is advantageous to a company. The most common reason stated for this belief is that stockholders prefer a steady income from their investments. There is at least one other important reason for thinking that a highly variable dividend rate may not be in the best interest of a company. In the long run, the value of a share of stock tends to be determined by the discounted value of the expected dividends. Insofar as this is the case, a widely fluctuating dividend rate will tend to make it difficult for stockholders to determine the value of the stock to them and as a result, the stock is likely to sell at a somewhat lower price than comparable stocks paying the same average dividend through time, but making the payments at a steady rate. This conclusion assumes investors are risk averse. Reasons for Paying Dividends There have been two rules of thumb with respect to Dividend Policy of publicly held corporations; first, that it is necessary for the firm to pay cash dividends to common stockholders and second, the dividends through time must increase. It is far from obvious that the above policies are optimum from the point of view of maximizing the well-being of stockholders. In this chapter we consider the effect of different dividend policies on the well-being of the common stockholders...
eBook - ePubCorporate Finance
A Practical Approach
- Michelle R. Clayman, Martin S. Fridson, George H. Troughton(Authors)
- 2012(Publication Date)
- Wiley(Publisher)
...This chapter introduces the theory and practice of Dividend Policy with reference to world markets. This chapter is organized as follows: In Section 2, we present theories of the effects of Dividend Policy on company value. In Section 3, we discuss factors that affect Dividend Policy. In Section 4, we cover the types of dividend policies, the dividend-share repurchase decision, and global trends in payout policy. Section 5 covers analysis of dividend safety, and conclusions and summary are in Section 6. 2. Dividend Policy AND COMPANY VALUE: THEORY Over the past 40 years, financial theorists have debated the extent to which Dividend Policy should and does matter to a company’s shareholders. One group of theorists believes that Dividend Policy is irrelevant to shareholders. This group typically holds that only the decisions of the company that are directly related to investment in working and fixed capital affect shareholders’ wealth. A second group holds that Dividend Policy does matter to investors, for one or more reasons, and that a company can affect shareholders’ wealth through its Dividend Policy. Typically, dividend relevance is attributed to either a presumption that investors value a unit of dividends more highly than an equal amount of uncertain capital gains, or to one or more market imperfections. Such imperfections include taxes (in which a given amount of dividends is taxed differently than an equal amount of capital gains), asymmetric information (specifically, that corporate insiders are better informed about their company’s prospects than outside investors), and agency costs (in particular, that management has a tendency to squander extra cash). We examine these positions and the assumptions that underlie them in the following subsections. 2.1...
eBook - ePub- Clive Marsh(Author)
- 2012(Publication Date)
- Kogan Page(Publisher)
...CHAPTER FIFTEEN Dividend Policy W hen a company finds that it has more cash than it can retain in the businesses to provide an attractive return it may decide to pay the shareholders a dividend. If a business is retaining cash in the business that is not increasing the value of the business ahead of other investment opportunities for shareholders, then the shareholders can reasonably expect the company to pay out a dividend. It is the directors who decide on the size of dividends, and although shareholders might have the power to reduce a dividend they generally do not have the power to increase it. The directors decide on Dividend Policy. The questions facing directors regarding dividend payments are around how much cash should be paid to shareholders and how much should be retained in the business for investment and for managing future market conditions and risks? When the directors have decided how much to pay to shareholders, the next question is what form the return should take. Paying a dividend or keeping the funds in the company? It would be very hard for a company to always find new investment opportunities for the surpluses and retained funds generated by its operations. In most cases a successful and profitable company will find that it needs to pay a dividend since this is the best option for shareholders. It may be impossible for a company to profitably re-invest every pound it makes. When a company pays dividends this should not be construed by the markets as meaning that the company is running out of new ideas, since in most cases having funds available is inevitable with successful companies. New opportunities in a sector may not keep pace with earnings generated. What form should a distribution take? A company may wish to pay a consistent and predictable dividend. If a company cannot be sure of a consistent dividend level it might consider alternatives such as buying back shares...
eBook - ePub- Kalpesh Ashar, Vibrant Publishers(Authors)
- 2022(Publication Date)
- Vibrant Publishers(Publisher)
...The stability of dividends is more important than whether the company pays high dividends or not. As long as it pays stable dividends, it will attract and retain like-minded investors. ● As per the Residual Dividend Model, companies estimate their profits and investment opportunities over a 5-10 years period, and decide their dividend payout ratio accordingly, in order to keep it constant. ● Another way companies distribute profits to investors is via dividend reinvestment plans. Instead of paying out cash dividends, companies buy additional stocks in the investor’s name. ● Companies may split their stocks if the stock price has increased to a very high value. This is seen as a positive sign by the investors. Stock dividends are similar to stock splits. Companies may give a 10% stock dividend to existing stockholders. This means that each stockholder will receive 10 additional shares for every 100 shares held without any extra cost. ● Instead of paying out cash dividends companies often buy back shares. These are called treasury stocks. The company generally pays a premium when buying back stocks ● A stock repurchase also sends a positive signal to stockholders about the management’s expectations about future prospects....
eBook - ePub- Vibrant Publishers, Kalpesh Ashar(Authors)
- 2019(Publication Date)
- Vibrant Publishers(Publisher)
...Stability of dividends is more important than whether the company pays high dividends or not. As long as it pays stable dividends, it will attract and retain like-minded investors. c) As per the Residual Dividend Model, companies estimate their profits and investment opportunities over a 5-10 years period, and decide their dividend pay-out ratio accordingly, in order to keep it constant. d) Another way companies distribute profits to investors is via dividend reinvestment plans. Instead of paying out cash dividends, companies buy additional stocks in the investor’s name. e) Companies may split their stocks if the stock price has increased to a very high value. This is seen as a positive sign by the investors. Stock dividends are similar to stock splits. Companies may give 10% stock dividend to existing stockholders. This means that each stockholder will receive 10 additional shares for each 100 shares held without any extra cost. f) Instead of paying out cash dividends companies often buy back shares. These are called treasury stock. The company generally, pays a premium when buying back stocks. A stock repurchase also sends positive signal to stockholders about the management’s expectations about future prospects. *****...
