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Financial Management - DIVIDEND POLICIES

Introduction of DIVIDEND POLICIES

   Posted On :  20.06.2018 04:33 am

Dividend policy and decision are critical and crucial areas of management.

Introduction
 
Dividend policy and decision are critical and crucial areas of management. Dividends are earnings which are distributed to the shareholders. The percentage of earnings paid or dividends declared is called payout ratio.
 
A high pay out means more dividends and this will lead to less funds internally generated and available for expansion and growth. A low pay out therefore should result in higher growth as retained earnings are significant internal sources of financing the growth of the firm.
 
Such dividend policies affect the market value of the firm. Whether such dividend will result in increased value or not will be directly dependent on the profitable investment opportunities available and exploited by the firm.
 
On the other hand, there is a predominant view that dividends are bad as they lead to the payment of higher taxes and they reduce the shareholders’ wealth. Dividends when declared are taxed by the governments. Despite this there is a strong investor expectation that dividends are a form of rewards to them.
 
Given these different perceptions, what is the ideal position in the dividend declarations? How do companies construct their dividend policies? What are the factors reckoned in constructing such policies?

I. What is dividend?

 
A dividend is a bonus, an extra, a payment, a share or a surplus or periodical return on any original investments. Suppose we have invested in a company Rs.100,000 as a share holder and the company declares a return of say Rs.10,000 on this investment in a particular year, then the return is called the dividend on the investment made and the dividend pay out is 10%.
 

II. How do we define dividends?

 
Thus dividend is the distribution of value to shareholders, normally out of the profits made by the firm in a particular year. Of course, unlike interest payable on a deposit or a loan which is compulsory payment, dividend is not a compulsory yearly payment. Only if the company makes a profit decides to distribute such profits, declare dividends, the share holders will get a return. 
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