Factors Determining Dividend Policy - Dividend Decision, Accountancy and Financial management Video Lecture | Accountancy and Financial Management - B Com

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today we are going to study factors
affecting dividend policy
the factors affecting dividend policies
are type of industry ownership structure
age of corporation extent of shear
distribution difference shareholders
expectation leverage future financial
requirement business cycles growth
changes in government policies
profitability taxation policy
of profits liquidity legal rules
inflation control objectives
the following are the various factors or
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 ownership structure
the ownership structure of a company
also impacts the policy a company with
the 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 favour 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 the extent of sheer
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
different cheer holders expectations
another factor that impacts the policy
is the diversity in the type of
shareholders a company has a different
group of shareholders will have
different expectations the company needs
to clearly understand the different
expectations and formulate a successful
dividend policy leverage a company
having more leverage in their financial
structure and consequently frequent
interest payments will have to decide
for a low dividend payout whereas a
company utilizing their retained
earnings will prefer high dividends
future financial requirements dividend
payout will also depend on the future
requirements for the additional capital
a company having profitable investment
opportunities is justified in retaining
the earnings business cycles when the
company experiences a boom it is prudent
to save up and make reserves for di
piece such reserves will help a company
declare high dividends even in
depressing markets to retain and attract
more shareholders
growth companies with a higher rate of
growths as reflected in their annual
sales growth a ratio of retained
earnings to equity and return on net
worth prefer high dividend payouts to
keep their investors happy changes in
government policies there could be the
change in the dividend policy of a
company due to the imposed changes by
the government profitability the
profitability of a firm is reflected in
net profit ratio current ratio and ratio
of profit to total assets a highly
profitable company generally pays higher
dividends and vice-versa
taxation policy the corporate taxes will
affect dividend policy either directly
or indirectly the taxes directly reduce
the residual earnings after taxes year
holders indirectly the dividend
distribution is taxable after a certain
limit
trends of profits even if the company
has been profitable over the years the
trends should be properly analyzed to
find the average earnings of the company
this average number should be then
studied in relation to the general
economic conditions this will help in
opting for a conservative policy if the
Depression is approaching liquidity
liquidity has a direct relation with the
dividend policy if a firm has a strong
liquidity and enough cash for its
working capital it can afford to pay
higher dividends however a firm with
less liquidity will choose a
conservative dividend policy legal rules
there are certain legal restrictions on
the companies for dividend payments it
is legal to pay a dividend only if the
capital is not reduced post payment
these rules are in place to protect
creditors interest
inflation inflationary environments
compel companies to retain major part of
their earnings and indulge in lower
dividends as the prices rise the
companies need to increase their capital
reserves for their purchases and other
expenses control objectives the firm's
aiming for more control in the hands of
current shareholders prefer a
conservative dividend payout policy it
is imperative to pay fewer dividends to
retain more control and the earnings in
the company in a nutshell the management
of a company is completely free to frame
the required dividend policy there are
no obligations to be adhered to so the
company needs to judiciously weigh all
the above-mentioned factors and
formulate a balanced dividend policy a
dividend policy can also be revised in
the wake of changes in any of the
factors
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