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Factors Determining Dividend Policy - Dividend Decision, Accountancy and Financial Management Notes | Study Accountancy and Financial Management - B Com

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Factors Determining Dividend Policy

Profitable Position of the Firm

Dividend decision depends on the profitable position of the business concern. When the firm earns more profit, they can distribute more dividends to the shareholders.

Uncertainty of Future Income

Future income is a very important factor, which affects the dividend policy. When the shareholder needs regular income, the firm should maintain regular dividend policy.

Legal Constrains

The Companies Act 1956 has put several restrictions regarding payments and declaration of dividends. Similarly, Income Tax Act, 1961 also lays down certain restrictions on payment of dividends.

Liquidity Position 

Liquidity position of the firms leads to easy payments of dividend. If the firms have high liquidity, the firms can provide cash dividend otherwise, they have to pay stock dividend.

Sources of Finance

If the firm has finance sources, it will be easy to mobilise large finance. The firm shall not go for retained earnings.

Growth Rate of the Firm 

High growth rate implies that the firm can distribute more dividend to its shareholders.

Tax Policy 

Tax policy of the government also affects the dividend policy of the firm. When the government gives tax incentives, the company pays more dividend.

Capital Market Conditions 

Due to the capital market conditions, dividend policy may be affected. If the capital market is prefect, it leads to improve the higher dividend

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