A brief presentation on the factors affecting dividend policy prepared for class room presentation at Institute of Management in Kerala

1. FACTORS AFFECTING
DIVIDEND POLICY
Finance Management
Sharon M
MBG 1505032
SHARON M, INSTITUTE OF MANAGEMENT IN KERALA

2. DIVIDEND POLICY
“Policy that a company uses to decide the
amount to be paid to the shareholders in form of
dividends”
A company in growth may either choose to pay
dividend or may re-invest its profits
A company paying dividend should decide on the
amount to be paid and the time of payment
 Potential shareholders may critically evaluate
dividend policy before investing SHARON M, INSTITUTE OF MANAGEMENT IN KERALA

3. FACTORS AFFECTING DIVIDEND
POLICY
1.Stability of Earnings:
>More stable incomes, consistent dividend policy
>Often seen with firms dealing in necessities
2.Age of Corporation
>A newly established corporation will require more money for expansion and
may not a rigid policy
3.Liquidity of funds
>Greater the liquidity, greater company’s ability ot pay dividend
SHARON M, INSTITUTE OF MANAGEMENT IN KERALA

4. 4.Extend of Share Distribution:
>A closely held business (shareholders are known each other) will make it easy
for the company to have a flexible policy
>A widely held company (large,diverse shareholders) will demand higher and
frequent dividends
5.Need for Additional Capital
>Greater the need for additional capital, less likely for the company to have a
rigid policy
6.Trade Cycles:
>Dividend policy is adjusted to market oscillations
>During boom, a company may hold a part of profit as a reserve for
contingencies
>Higher rate of dividend may be used to attract investments during off periods
7.Government Policies
>Government might restrict the distribution of dividends
SHARON M, INSTITUTE OF MANAGEMENT IN KERALA

5. 8.Taxation Policy:
>Higher the tax rates, lower the dividends
>Divident-tax may be levied for distribution of dividend beyond a certain limit
>In India dividend tax is 7.5% for dividends beyond 10%
9.Legal Requirements:
>Company is required to provide for depreciation on its fixed and tangible
assets before declaring dividend on shares.
>Dividend should not be distributed out of capita
> Contractual liabilities should be fulfilled ,like,payment of dividend on
preference shares in priority over ordinary dividend
10. Past dividend Rate
>Current rate should be around average past rate
>Abnormally low or high rates will arouse speculation
SHARON M, INSTITUTE OF MANAGEMENT IN KERALA

6. 11.Ability to Borrow:
>Greater the ability to borrow (established firms), better would be the dividend
policy
12.Policy of Control:
>If greater control is desired, dividends will be declared at low rates to keep out
investors
13.Repayments of loan:
>Loan indebtedness usually means low or now dividends
>Sometimes lenders may demand restricted dividend distribution till the
repayments
14.Time :
>Dividend declaration should be at the time when cash outflow is at the
minimum
15.Regularity and Stability
>Greater the regularity and stability of dividend payment, more investers will be
attracted. SHARON M, INSTITUTE OF MANAGEMENT IN KERALA

7. THANK YOU
SHARON M, INSTITUTE OF MANAGEMENT IN KERALA