Legal provisions relating to dividends as laid down in sections 93,,A, and of the Companies Act, are significant because they lay down a framework within which dividend policy is formulated. These provisions require that dividend can be paid only out of current profits or past profits after providing for depreciation or out of the moneys provided by Government for the payment of dividends in pursuance of a guarantee given by the Government.
Companies Act, further, provides that dividends cannot be paid out of capital, because it will amount to reduction of capital adversely affecting the security of its creditors. The amount and trend of earnings is an important aspect of dividend policy. It is rather the starting point of the dividend policy. Although, legally, the discretion as to whether to declare dividend or not has been left with the Board of Directors, the directors should give the importance to the desires of shareholders in the declaration of dividends as they are the representatives of shareholders.
Desires of shareholders for dividends depend upon their economic status. Investors, such as retired persons, widows and other economically weaker persons view dividends as a source of funds to meet their day-to-day living expenses. To benefit such investors, the companies should pay regular dividends. On the other hand, a wealthy investor in a high income tax bracket may not benefit by high current dividend incomes. Such an investor may be interested in lower current dividends and high capital gains.
It is difficult to reconcile these conflicting interests of the different type of shareholders, but a company should adopt its dividend policy after taking into consideration the interests of its various groups of shareholders. Nature of industry to which the company is engaged also considerably affects the dividend policy.
Certain industries have a comparatively steady and stable demand irrespective of the prevailing economic conditions. For instance, people used to drink liquor both in boom as well as in recession. Such firms expect regular earnings and hence can follow a consistent dividend policy. On the other hand, if the earnings are uncertain, as in the case of luxury goods, conservative policy should be followed.
Such firms should retain a substantial part of their current earnings during boom period in order to provide funds to pay adequate dividends in the recession periods.
Thus, industries with steady demand of their products can follow a higher dividend payout ratio while cyclical industries should follow a lower payout ratio. This type of dividend is known as Constant Dividend Per Share. Such type of dividends are favoured by shareholders as it enables them to plan their future investment and gives a clear picture of their invested money.
Firms having the policy of steady or constant dividends when pay some extra amount to the shareholders along with the steady dividends due to any reason, like better earnings of the firm for that time period, silver jublee of the firm, etc. The dividend declaration policy must follow Companies Act, , while along with this, separate contractual provision must also be completed. Also, internal constraints are also taken into consideration while deciding dividends.
Still left with any doubts regarding the topic?? Share on Facebook Share. Share on Twitter Tweet. Share on Google Plus Share. Share on Pinterest Share. Share on LinkedIn Share. Dividend Payout Ratio I. Stability of Dividend I. Constant Dividend Payout II. Steady Dividend Plus Extra 3.
Legal, Contractual and Internal Constraint I. Internal Constraints Found the content useful?? Share it among your friends and help them too If there is a large tax rate that will be charged on a cash dividend, there may be alternative methods used to reward shareholders.
One such method is a stock dividend, which gives investors more shares of the company. The control of taxes will be in the hands of shareholders and will be due when the shares are sold.
Another method that is commonly used by companies is by repurchasing shares that are outstanding. This does not result in investors receiving more cash or shares of the company, instead owning a larger percentage. There are also no tax consequences until the shares are sold. There will be some cases where a company may only one means of paying shareholders, such as a cash dividend payment, while others will use multiple options, like cash dividends, stock dividends, and share buybacks.
As such, knowing this information could help to benefit your overall net worth. A company may want to pay a dividend, or increase an existing one, but lack the ability to do so.
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Stability of dividend means how regular or stable is the dividend policy of a firm over a period of time. Shareholders prefer stable dividends along with some growth in those dividends. If a firm is able to pay dividends in a such a way then the cost of shares will increase.
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He found that the current year’s earnings is the foremost factor affecting the dividend behaviour of a firm and concludes that Indian Decision, Vol. 37, No. 2, August, The Determinants of Corporate Dividend Policy 66 companies follow a stable cash dividend policy. Determinants of a business’ dividend policy depend on its goals. A company that is looking to grow by investing in its business or making an acquisition will look to .
The dividend policy determinants have been well documented and researched in developed countries (US, Canada, UK, Germany, France and Japan) USA and European markets (Lintner , Modigliani and Miller , Pettit , Black &. Dividend policy is an unsolved mystery in the field of finance. Even after decades of investigations, scholars still disagree on the factors that influence dividend decisions of companies. Hence, this paper explored the determinants of dividend policy of companies listed on the Stock Exchange of Mauritius.