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Unit 4
DIVIDEND
Decision

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Profit
 INTRODUCTION
The term dividend refers to that part of profits of a company
which is distributed by the company among its shareholders. The
investors basically have two desires, a) high percentage of dividends
& b) increase in their investment. These two factors influence the
dividend policies.
The percentage of dividend is mainly a decision of the
management which is decided on the basis of the present earnings,
growth rate and opportunities for expansion & diversification.
since dividend is a right of shareholders to participate in the
profits and surplus of the company. For their investment in the share
capital of the company, they should receive fair amount of profits.
The company should therefore distribute a reasonable amount
as dividends to its members and retain the root funds for its growth
and survival.
 MEANING
DIVIDEND:- It refers to the divisible profits of a company
distributed or divided among its shareholders in
proportion to their shareholdings.

DIVIDEND POLICY:- It is that policy of management of

a company concerning the portion of profits to be
distributed to shareholders as dividend & portion of
profits to be retained in the company as retained
earnings.

DIVIDEND DECISION:- It is concerned with allocation

of profit towards payment of dividends to the
shareholders as well as rate of retained earnings.
 FACTORS INFLUENCING DIVIDEND POLICY
1. Stability of earnings
2. Financial policy of the company
3. Liquidity of funds
4. Dividend policy of competitive concerns
5. Past dividend rates
6. Debt obligations
7. Ability to borrow
8. Growth need of the company
9. Profit rate
10. Legal requirement
11. Policy of control
12. Corporate taxation policy
13. Tax position of shareholders
14. Effects of trade cycle
15. Attitude of interested group
TYPES/FORMS OF DIVIDEND POLICY
1. REGULAR DIVIDEND POLICY
The payment of dividend at the usual rate is termed as
regular dividend.
ADVANTAGES
Establishing a profitable record of the company.
Creating confidence amongst the shareholders.
It aids in long term financing & renders financing easier.
Establishing the market value of shares.
The ordinary shares view dividends as a source of funds to
meet their day-to-day living expenses.
2. STABLE DIVIDEND POLICY
The term stability of dividend means consistency or lack of
variability in the stream of dividend payment to the shareholders.
A stable dividend policy may be established in any of the
following 3 forms:
a. Constant dividend per share:- Some companies follow a policy of
paying fixed dividend per share irrespective of the level of earnings
year after year.
b. Constant pay-out ratio:- It means payment of a fixed percentage of
net earnings as dividends every year.
c. Stable rupee dividend plus extra dividend:- Some companies follow a
policy of paying constant low dividend per share plus an extra
dividend in the years of high profits.
ADVANTAGES OF STABLE DIVIDEND POLICY
• It creates confidence among investors towards the company.
• It creates regular income to investors.
• It attracts institutional investors.
• It is easy to raise additional funds for the company to expand & develop the
business.
• It creates stability in market price of shares.
• It creates easy availability of debt funds.
• It increases the reputation of the company.
• It provides details about the profitability of the company, amount maintained as
reserves & amount used towards the payment of dividend.
• It facilitates for profit maximization.
• It maximizes the wealth of the company.
• It helps for the company to survive for log term.
• It helps for the company to control cash flows.
DANGERS OF STABLE DIVIDEND POLICY
Once a stable dividend policy is followed by a
company, it is not easier to change it.
If the stable dividends are not paid to the
shareholders on any account including insufficient
profits, the financial standing of the company in the
mind of the investors is damaged and they may like
to dispose off their holdings. It adversely affects the
market price of shares of the company.
3. IRREGULAR DIVIDEND POLICY
Some companies follow irregular dividend
payments on account of the following:
Uncertainty of earnings
Unsuccessful business operations
Lack of liquid resources
Fear of adverse effects of regular dividends on the
financial standing of the company.
4 . NO DIVIDEND POLICY
A company may follow a policy of
paying no dividend presently because of
its unfavourable working capital position
on account of requirements of funds for
future expansion and growth.
 FORMS OF DIVIDEND
Dividends can be classified into various forms.
• Profit dividends
• Liquidation dividends.
Dividends may also be classified on the basis of
medium in which the payment made. They are,
I. Cash dividend
II. Scrip dividend
III. Bond dividend
IV. Property dividend
V. Stock dividend/ Bonus shares
I. CASH DIVIDEND:- It is the dividend which is distributed to the
shareholders in cash out of the earnings of the business.
II. SCRIP DIVIDEND:- The shareholders are issued transferrable
promissory notes which may/ may not be interest bearing. The
objective of scrip dividend is to postpone the immediate payment
of cash.
III. BOND DIVIDEND:- The shareholders may have to wait few months
to convert their bonus into cash.
IV. PROPERTY DIVIDEND:- This dividend is paid in the form of some
assets other than cash.
V. STOCK DIVIDEND:- If a company does not have liquid resources, it is
better to declare stock dividend.
 ADVANTAGES OF STOCK DIVIDEND
a) FOR ISSUING COMPANY b) FOR INVESTORS
 Maintenance of liquidity  Increase in their equity.
position.  Increase in income.
 Satisfaction of  Increased demand for
shareholders. shares.
 Enhance prestige.  Increased marketability of
 Widening share market. shares.
 Conservation of control.
 Financing for expansion
program.
 DISADVANTAGES OF STOCK DIVIDEND
a) FOR COMPANY b) FOR INVESTORS
 Increase in capitalization of  Disappointment of
the corporation. shareholders.
 More liabilities on the  Lowers the market value of
company. existing shares.
 Prevents investors.
 Undiluted control over the
management.
 OBJECTS OF STOCK DIVIDEND
Conservation of cash

Financing expansion program

Transferring the formal ownership of surplus and

reserves to the share holders

Enhanced prestige

Widening share market

 Dividend Theories

Irrelevance Theories
Relevance Theories
(i.e. which consider
(i.e. which consider
dividend decision to be
dividend decision to be
irrelevant as it does not
relevant as it affects the
affects the value of the
value of the firm)
firm)

Modigliani and
Walter’s Model Gordon’s Model Miller’s Model
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