DIVIDEND POLICY

Dividend Policy



Dividend Policy

Dividends

Dividend is the distribution of value to shareholders. What happens to the value of the firm as dividend is increased, holding everything else (capital budgets, borrowing) constant. Thus, it is a trade-off between retained earnings on one hand, and distributing cash or securities on the other.

Types of Dividends

The different types of dividends include:

* Special dividend: Normally, public companies declare their dividends on a specific schedule; however, they also have the option to declare a dividend at any time. This type of dividend is referred to as a special dividend.

* Cash dividend: Paid in checks, this is the most basic form of dividend. Cash dividends considered a type of investment earnings, and are taxable.

* Stock dividend: Given in the form of bonus shares or stocks of the issuing company or a subsidiary company. Normally, they are offered on the basis of a prorata allotment.

* Property (in kind) dividend: Distributed in the form of assets by the issuing company or a subsidiary company.

* Other types of dividend: Warrants and financial assets having market value are also distributed in the form of dividends.

The distribution of dividends requires the approval of the board of directors, who declare the time or date when the dividend will be distributed. The dates are categorized into four types:

* Ex-dividend date: The ex-dividend date is defined as the date subsequent to which every share that is traded does not have any right to claim the dividend, which has been declared in the immediate past.

* Declaration date: The declaration date is defined as the date on which the board of directors declares its aim for payment of dividend. On this date, the payment date and the record date are also announced.

* Record date: The record date is defined as the date on or before which the shareholders who have officially recorded their ownership and are entitled to get the dividend.

* Payment date: The payment date is defined as the date on which the checks of dividend will be sent to shareholders or deposited to brokerage accounts.

Dividend Policy

Dividend policy refers to the policy chalked out by companies regarding the amount it would pay to their shareholders as dividend. With profit making comes the question of utilizing the profit gainfully.

The companies have two options with them:

* They can retain these profits within the company

* They can pay these profits in the form of dividends to their shareholders

The dividend policy to be adopted by the company is based on these two options. Once this is sorted out, a permanent dividend policy can be put into place. These policies shape the attitude of the investors and the financial market in general towards the concerned company. The policies are decided according to the current and future financial positions of the company. The preference and orientation of the investors are also taken into account.

The following are the types of dividend policies:

* Constant Payout Ratio

* Constant Dollar Dividend Policy

* Regular ...