Dividend Policy
A dividend is the distribution of profit or the portion of net income paid out to shareholders. It is paid to shareholders in cash or stock for making investments and bearing risks.
Dividend policy is simply concerned with determining the portion of a firm’s earnings into dividends and retained earnings in the firm. A firm’s dividend policy is influenced by a large numbers of factors. Some factors affect the number of dividends and some factors affect the types of dividends.
A dividend policy refers to how a company structures its dividend payouts to shareholders. According to some researchers, the dividend policy is irrelevant, in theory, since investors may be able to sell a part of their shares or portfolio when they need cash.
The dividend irrelevance theory holds that dividend payouts have little impact on stock prices. However, whether the dividend policy is relevant or not, it is a source of income for shareholders. A generous dividend policy often benefits company leaders, who are often the largest shareholders.
Dividend policies are viewed by most companies as integral to their corporate strategies. Dividend payments are influenced by many factors, including the amount, timing, and other factors. Dividend policies are divided into three types: the constant dividend policy, the stable dividend policy, and the residual dividend policy.