Dividend Policy Essay

Dividend policy can be described as a policy which devised the guidelines, rules, and procedures for paying out the dividends to company’s shareholders. Basically the policy is used to decide how much of company’s earnings will be paid out to shareholders in the form of dividends.

Dividend Fundamentals:

Dividend is basically a certain percentage of profit paid out to the shareholders of a company against their investments, and hence acts as a return to them against the finance they provide to the firm through the purchase of shares. Dividends are distributed after payments of loan interest, and taxation. It is essentially the amount of dividend paid by a specific entity/ organization to its shareholder’s which determines the value of its shares.

These approaches are namely: Residual Dividend Policy, Dividend Stability Policy, and Hybrid Dividend Policy.

Residual Dividend Policy:

When a firm decides to adopt a residual dividend policy, it prefers to pay out dividends once all the requirements for funding different operations and projects are met through arranging the finance internally. The dividend payments in this case are made from the capital/retained earnings that are left after providing funds for different line of operations. If a company follows a residual dividend policy the shareholders are only paid dividends if substantial amount is left after financing expansion and operating expenses.

To pay out the dividends under residual dividend policy a company follows three steps.

Step # 1 : A company tries to determine a dividend ratio at which it can achieve a desirable capital budget. It means that a dividend ratio should be such at which company can easily finance its business needs/

Dividend Stability Policy:

Under a Dividend Stability policy, taking into account the yearly earnings, amount of dividends are declared quarterly. Dividend stability policy is adopted to remove the uncertainties associated with residual dividend policy , where the shareholders are not certain whether they are going to be paid dividends or not. So according to the dividend stability policy stockholders are always paid out of the profits.

Hybrid Dividend Policy:

The last approach is a blend between the remaining and stable profit strategy. Utilizing this approach, organizations tend to see the obligation/value proportion as a long haul as opposed to a fleeting objective. In today's business sectors, this approach is usually utilized by organizations that compensation profits. As these organizations will by and large experience business cycle vacillations, they will by and large have one set profit, which is set as a generally little part of yearly pay and can be effectively kept up. On top of this set profit, these organizations will offer another additional profit paid just when pay surpasses general