What is Dividend?
The term ‘dividend’ means some portion of the company’s profit or retained earnings is given to its shareholder in proportion to the number of shares held by each shareholder may be in the form of cash, rewards or in any other forms.
Important Dividend Dates
As the dividend is paid by the companies in a sequential manner according to the associated dates, it is important to determine the shareholder who is going to receive the dividend.
- Announcement date – On announcement date, the management of the company announces the dividend, which must be approved by each and every shareholder who is going to receive the dividend before they can be paid.
- Record date – Record date is also known as cut-off date, on which the company identifies which shareholder is eligible to receive dividend.
- Payment date – Payment date is the date on which the company issues the payment of dividend, and the investors account is credited with their respective amount.
Steps to Show How Dividend Works
The value of the Dividend is determined on the basis of per-share and for all the same class of shareholders the amount is paid equally.
Step 1 – In the very first step, the company earns profit and from that profit keeps some part of the profit for any further use, which is known as retained earnings.
Step 2 – The excess profit that the company did earn,from that profit, the company plans to distribute some part to the shareholder instead of reinvesting.
Step 3 – After the second step, the approval of the planned dividend should be passed by the Board of Directors of the company.
Step 4 – Once the approval is given, the company announces things related to the dividend like value per share, record date, payment date, etc.
Step 5- In the last step, the dividend is paid out to the shareholders.
In simple language, dividend policy means company decides or structures the payout rate i.e., how much is paid to the shareholders as a dividend. In every company, their dividend policy plays a vital role in the growth of the company because dividend policy is one of the factors which helps the investors in selecting the right company to invest company’s share.
Dividend help the investors to earn higher returns this is also one of the reasons why investors look at the dividend policy of a company. Dividend policy also reflects the financial performance of the company.
Importance of Dividend Policy
It is necessary that every company adopts dividend policy. Let us understand it with an example how much dividend policy is important for business. It is quite common that every human being in this universe wears clothes in public; from this it can be said that it must be important to wear clothes in public.
Just like wearing clothes in public is important, a dividend policy in a company is also important. So, below there are few points explaining the importance of dividend policy:
- It helps to attract new investors: If the companies have a sound dividend policy then it helps the investors to determine what they are going to get if they invest in this company shares of stocks. It helps the company to attract new investors. A sound dividend policy helps to build trust with the investors and also provides confidence to the investors in their investment. A sound dividend policy shows that the company is well-managed, stable, and also profitable in nature.
- It affects stock price and their values: Dividend policy influences the price of stock and their values because the valuation of stock is done on the basis of current and projected dividend paid by the company.
- Helps in attracting institutional investors: If the company has a sound dividend policy which helps the company to build a good and strong reputation in the market, then this strong market reputation helps to attract the institutional investor who is interested in investment.
- It helps to create a market for preference shares and debenture: When a company has a good reputation in the market along with sound dividend policy, then it will also be able to borrow funds through the issue of debentures and preference shares, along with equity shares.
- It provides tax advantages: The rate of the tax is less on the qualified dividend in comparison to the tax rate of income tax charged.
Types of Dividend Policy
Four Types of Dividend Policy
Regular Dividend Policy
Regular policy Dividend is also known as constant dividend policy. Under this policy, among the overall profit of the company, a certain percentage of the company's profit is given to the shareholder as dividend.
With the earnings of the company, the shareholders earnings also increase and vice-versa. Mainly this type of dividend policy is adopted by the company, to create goodwill in the market.
Stable Dividend Policy
Under stable dividend policy, the amount of dividend is fixed by the company and that fixed amount is paid to the shareholders every year. In this dividend policy, a company is bound to pay a dividend to shareholders even if they are incurring loss and also the amount of dividend is going to be changed even if the company is earning higher profits.
For example – if the payout rate is $30% it means that the shareholder is going to receive $30% of the company earnings, whether the company is making profit or earning $2,00,000 or $10,00,000.
Irregular Dividend Policy
Under irregular Dividend policy, the company does not give any commitment regarding the payment of dividend. The company may or may not pay a dividend to their shareholders. All the dividend decisions should be taken by the board of directors.
This type of policy is adopted by those companies who do have regular flows of income and mainly in this type of companies investors are not at all interested to invest as they think it is very risky.
No Dividend Policy
Under no dividend policy, no dividend is paid by the companies to their shareholders. All the profits are retained by the company for business growth.
Context and Applications
This topic is significant in the professional exams for both undergraduate and graduate courses, especially for
- Bachelor of Commerce
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