Question

Aims and objectives of report about dividend policy of any company

Answer 1

Dividend pay-out ratio is calculated by dividing the dividend per share by earnings per share. It indicates the proportion of earnings distributed as dividend. Lower dividend pay-out ratio indicates conservative dividend policy. However, high dividend pay-out ratio shows liberal dividend policy which may put a question mark over financing of future projects.

ii. Stability of Dividend:

Usually shareholders prefer a stable dividend policy which means they require a certain minimum percentage of dividends to be paid regularly to them. Therefore, divi­dend policy should be devised taking into account this aspiration of the shareholders.

iii. Liquidity:

The liquidity position of a company affects the dividend policy. Payment of dividend requires availability of cash resources. Future investment opportunities should also be taken into consideration.

iv. Divisible Profit:

Dividends can be declared out of revenue profits but not out of capital profit. This means dividend can be declared out of divisible profit, i.e. the profit which is legally available for distribution as dividend to the shareholders. In certain cases, capital profit may be distributed as dividend if it is realized in cash and it is permitted by the articles of association.




v. Legal Constraints:

All requirements of The Company’s Act and SEBI guidelines must be kept in mind before declaring dividend.

vi. Owner’s Consideration:

Tax statuses of shareholders, availability of investment opportunities, own­ership dilutions, etc., are the different factors that affect shareholders. These factors should be taken into consideration while devising a dividend policy.

vii. Capital Market Conditions and Inflation:

Capital market conditions and inflation play a domi­nant role in developing the dividend policy. A company having an easy access to the capital market will follow a liberal dividend policy in comparison to others. During times of inflation a good com­pany tries to satisfy its shareholders by paying higher dividends.

Objectives of Dividend Policy:

Dividend policy refers to the decision of the board regarding distribution of residual earnings to its shareholders. The primary objective of a finance manager is the maximization of wealth of the share­holders. Payment of dividend leads to increase in the price of shares on the one hand but leads to a crunch in liquid resources for financing of prospective projects. There is an inverse relationship between dividend payment and retained earnings.

The main objectives of a dividend policy are:

i. Wealth Maximization:

According to some schools of thought dividend policy has significant impact on the value of the firm. Therefore the dividend policy should be developed keeping in mind the wealth maximization objective of the firm.

ii. Future Prospects:

Dividend policy is a financing decision and leads to cash outflows and also leads to decrease in availability of cash for financing of profitable projects. If sufficient funds are not available, a firm has to depend on external financing. Therefore the dividend policy needs to be devised in such a manner that prospective projects may be financed through retained earnings.

iii. Stable Rate of Dividend:

Fluctuation in the rate of return adversely affects the market price of shares. In order to have a stable rate of dividend, a firm should retain a high proportion of earnings so that the firm can keep sufficient funds for payment of dividend when it faces loss.

iv. Degree of Control:

Issue of new shares or dependence on external financing will dilute the degree of control of the existing shareholders. Therefore, a more conservative dividend policy should be followed in order that the interest of existing shareholders is not hampered.