Dividend policy and decision are critical and crucial areas of management.
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?
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
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.
Tags : Financial Management - DIVIDEND POLICIES
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