Explain the verious factors affecting dividend policy
Answers
Factors affecting Dividend Policy
A company needs to analyze certain factors before framing their dividend policy.
The following are the various factors/determinants that impact the dividend policy of a company:
Type of Industry
The nature of the industry to which the company belongs has an important effect on the dividend policy. Industries, where earnings are stable, may adopt a consistent dividend policy as opposed to the industries where earnings are uncertain and uneven. They are better off in having a conservative approach to dividend payout.
Ownership Structure
The ownership structure of a company also impacts the policy. A company with a higher promoter’ holdings will prefer a low dividend payout as paying out dividends may cause a decline in the value of the stock. Whereas, a high institutional ownership
will favor a high dividend payout as it helps them to increase the control over the management.
Age of corporation
Newly formed companies will have to retain major part of their earnings for further growth and expansion. Thus, they have to follow a conservative policy unlike established companies, which can pay higher dividends from their reserves.
The extent of Share Distribution
A company with a large number of shareholders will have a difficult time in getting them to agree to a conservative policy. On the other hand, a closely held company has more chances of succeeding to finalize conservative dividend payouts.