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INTRODUCTION - Dividend

The document discusses the importance of dividend policy in companies, highlighting the decision-making process regarding profit distribution between dividends and retained earnings. It defines dividends as a share of profits distributed to shareholders and outlines the factors influencing dividend policy, including stakeholder satisfaction and financial management. The document emphasizes the need for a balanced approach to dividend distribution to maximize shareholder value while considering the company's growth and investment opportunities.

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4 views

INTRODUCTION - Dividend

The document discusses the importance of dividend policy in companies, highlighting the decision-making process regarding profit distribution between dividends and retained earnings. It defines dividends as a share of profits distributed to shareholders and outlines the factors influencing dividend policy, including stakeholder satisfaction and financial management. The document emphasizes the need for a balanced approach to dividend distribution to maximize shareholder value while considering the company's growth and investment opportunities.

Uploaded by

guptadityak20
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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INTRODUCTION

Once a company makes a profit, it must decide on what to do with those profits. They
could continue to retain the profits within the company, or they could pay out the profits to
the owners of the firm in the form of dividends. The dividend policy decision involves two
questions:
1. What fraction of earnings should be paid out, on average, over time? And,
2. What type of dividend policy should the firm follow? I.e. issues such as whether it
should maintain steady dividend policy or a policy increasing dividend growth rate etc.

On the other hand Management has to satisfy various stakeholders from the profit. Out of
the Stakeholders priority is to be given to equity share - holders as they are being the
highest risk.

DEFINITION: DIVIDEND
According to the Institute of Chartered Accountants of India, dividend is "a distribution to
shareholders out of profits or reserves available for this purpose."7
"The term dividend refers to that portion of profit (after tax) which is distributed among the
owners / shareholders of the firm."8
"Dividend may be defined as the return that a shareholder gets from the company, out of its
profits, on his shareholdings."9
In other words, dividend is that part of the net earnings of a corporation that is distributed
to its stockholders. It is a payment made to the equity shareholders for their investment in
the company.
As per the section 2(22) of the Income Tax Act, 1961, dividend defined as:-

"Any distribution of accumulated profits whether capitalized or not, if such distribution


entails a release of assets or part thereof".

7
Guidance Note on Terms used in Financial Statements, ICAI
8
R.P. Rustagi, Financial Management, Galgotia Publishing Company, 2001, p. 806
9
Dr. S.N. Maheshwari, Elements of Financial Management, Sultan Chand and Sons, 1999, p. C 71
Dividend is a reward to equity shareholders for their investment in the company. It is a
basic right of equity shareholders to get dividend from the earnings of a company. Their
share should be distributed among the members within the limit of an act and with rational
behavior of directors.
The word dividend has not been defined in The Indian Companies Act, 1956. It may be
described as a periodical cannot be declared from capital gains under following conditions:
i) Provision in Articles of Association.
ii) Capital gain must be realized.
All assets & liabilities must be revalued before distributing this capital gain.

DEFINITION: DIVIDEND POLICY


"Dividend policy determines the ultimate distribution of the firm's earnings between
retention (that is reinvestment) and cash dividend payments of shareholders."10
"Dividend policy means the practice that management follows in making dividend payout
decisions, or in other words, the size and pattern of cash distributions over the time to
shareholders."11
In other words, dividend policy is the firm's plan of action to be followed when dividend
decisions are made. It is the decision about how much of earnings to pay out as dividends
versus retaining and reinvesting earnings in the firm.
Dividend policy means policy or guideline followed by the management in declaring of
dividend. A dividend policy decides proportion of dividend and retains earnings. Retained
earnings are an important source of internal finance for long term growth of the company
while dividend reduces the available cash funds of company.

"As long as the firm has investment project whose returns exceed its cost of capital, it will
use retained earnings to finance these projects".12
There is a reciprocal relationship between retained earnings and dividend i.e. larger the
retained earnings, lesser the dividend and smaller the retained earnings, larger the dividend.

10
Moyer Mc Guigan Kretlow, Contemporary Financial Management, Eight edition, Southwestern
College Publishing, 2001 p. 516
11
Ronald C. Lease, Kose John, Avner Kalay. Uri Loewenstein, Oded H. Sarig, Dividend Policy- Its
Impact on Firm Value, Harvard Business School Press, Boston, Massachusetts, 2000 p. 29
12
Janis C. Vanhorn, 1975 F. Management and Policy Prentice Hall of India P. Ltd. N. Delhi, 1975,
Page 264.
James E. Walter (1963) says "Choice of dividend policy almost effects the value of the
enterprise”13
"Dividend policy must be evaluated in light of the objective of the firm namely, to choose a
policy that will maximize the value of the firm to its shareholders" Financial Management
and Policy.14
As we know in corporation, owners are shareholders but management is done through
Board of directors. It is the Board of Directors to decide whether to pay dividend or retain
earnings for future projects. It is a matter of conflict between shareholders and directors.
Shareholders expect a quick return on their capital. On the other hand, directors have to
consider a number of factors in determining divided policy.
Investors must keep an eye on the company's dividend policy for most companies regular
boosts in the face of irregular earnings can be a warning signal. So can the refusal of
Management to lower dividends when earning fall or capital requirement rise. Companies
with high dividend and rising debt may be borrowing money to pay shareholders. For
investors who are seeking stock that will advance on their performance and earning and
earning per share, lower dividend may mean high returns. (Adopted from the Quality of
earnings - Thornton O. Glove 1987)

The dividend policy of a company reflects how prudent its financial management is. The
future prospects, expansion, diversification mergers are effected by dividing policies and for
a healthy and buoyant capital market, both dividends and retained earnings are important
factors.

Most of the company follows some kind of dividend policy. The usual policy of a company
is to retain a position of net earnings and distribute the remaining amount to the
shareholders. Many factors have to be evaluated before forming a long term dividend
policy.

13
James Walter "Dividend Policy its effluence on the value of enterprise journals of finance-18th
May 1963 P. 280
14
James C. Vanhorn, Prantice Hall of India, 1975, P. 263.

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