Dividend Policy

DIVIDEND POLICY * Under dividend policy you should be ale to explain the following: * Dividend and types of dividend * Dividend policies and factors that affect dividend policy * Theories of dividend policy * It is a proportion of annual accounting profit or accumulated profit paid out to shareholders either in the form of cash or shares. * Dividend is recommended by the Board of directors for the approval of shareholders at Annual General Meeting (AGM). Shareholders can vote to accept it or to reduce it, but not to increase it. Note that dividend is only paid out of accumulated profit and not out of capital.
Dividend policy is the policy that determines how much of the accumulated profit should be paid out to shareholders * Stable dividend per share - Under this policy dividend is maintained even in case of a loss rather than profit in any year, to avoid negative signal to current and prospective shareholders. This policy favours shareholders.
Constant dividend pay out ratio- A constant percentage of earning is paid out as dividend. Dividend varies with variation in profits. It may not be desirable for shareholders * A compromise policy- compromise between stable and constant dividend pay out. Minimum dividend per share is paid plus a percentage increment in good years. * Residual dividend policy- This is a fluctuating dividend policy. Dividend is paid after available investment opportunities have been fulfilled.
Factors affecting dividend policy * Company’s growth rate * Restrictive covenants * Profitability * Earnings stability * Maintenance of control * Degree of financial leverage * Ability to finance externally * Uncertainty * Age and size * Tax penalties
FORMS OF DIVIDEND a) Regular dividend: cash payment to investors made at regular time intervals. b) Dividend reinvestment plans: the regular dividend is automatically reinvested by the company. c) Special