1. Stability of
Earnings. The nature of
business has an important bearing on the dividend policy. Industrial
units having stability of earnings may formulate a more consistent
dividend policy than those having an uneven flow of incomes because
they can predict easily their savings and earnings. Usually,
enterprises dealing in necessities suffer less from oscillating
earnings than those dealing in luxuries or fancy goods.
Age of corporation. Age of the
corporation counts much in deciding the dividend policy. A newly
established company may require much of its earnings for expansion
and plant improvement and may adopt a rigid dividend policy while, on
the other hand, an older company can formulate a clear cut and more
consistent policy regarding dividend.
Liquidity of Funds. Availability
of cash and sound financial position is also an important factor in
dividend decisions. A dividend represents a cash outflow, the
greater the funds and the liquidity of the firm the better the
ability to pay dividend. The liquidity of a firm depends very much
on the investment and financial decisions of the firm which in turn
determines the rate of expansion and the manner of financing. If
cash position is weak, stock dividend will be distributed and if cash
position is good, company can distribute the cash dividend.
Extent of share Distribution. Nature
of ownership also affects the dividend decisions. A closely held
company is likely to get the assent of the shareholders for the
suspension of dividend or for following a conservative dividend
policy. On the other hand, a company having a good number of
shareholders widely distributed and forming low or medium income
group, would face a great difficulty in securing such assent because
they will emphasise to distribute higher dividend.
Needs for Additional Capital. Companies
retain a part of their profits for strengthening their financial
position. The income may be conserved for meeting the increased
requirements of working capital or of future expansion. Small
companies usually find difficulties in raising finance for their
needs of increased working capital for expansion programmes. They
having no other alternative, use their ploughed back profits. Thus,
such Companies distribute dividend at low rates and retain a big part
6. Trade Cycles. Business
cycles also exercise influence upon dividend Policy. Dividend policy
is adjusted according to the business oscillations. During the boom,
prudent management creates food reserves for contingencies which
follow the inflationary period. Higher rates of dividend can be used
as a tool for marketing the securities in an otherwise depressed
market. The financial solvency can be proved and maintained by the
companies in dull years if the adequate reserves have been built up.
7. Government Policies. The
earnings capacity of the enterprise is widely affected by the change
in fiscal, industrial, labour, control and other government policies.
Sometimes government restricts the distribution of dividend beyond a
certain percentage in a particular industry or in all spheres of
business activity as was done in emergency. The dividend policy has
to be modified or formulated accordingly in those enterprises.
8. Taxation Policy. High
taxation reduces the earnings of he companies and consequently the
rate of dividend is lowered down. Sometimes government levies
dividend-tax of distribution of dividend beyond a certain limit. It
also affects the capital formation. N India, dividends beyond 10 %
of paid-up capital are subject to dividend tax at 7.5 %.
Legal Requirements. In
deciding on the dividend, the directors take the legal requirements
too into consideration. In order to protect the interests of
creditors an outsiders, the companies Act 1956 prescribes certain
guidelines in respect of the distribution and payment of dividend.
Moreover, a company is required to provide for depreciation on its
fixed and tangible assets before declaring dividend on shares. It
proposes that Dividend should not be distributed out of capita, in
any case. Likewise, contractual obligation should also be fulfilled,
for example, payment of dividend on preference shares in priority
over ordinary dividend.
10. Past dividend
Rates. While formulating the
Dividend Policy, the directors must keep in mind the dividend paid in
past years. The current rate should be around the average past rat.
If it has been abnormally increased the shares will be subjected to
speculation. In a new concern, the company should consider the
dividend policy of the rival organisation.
Ability to Borrow. Well
established and large firms have better access to the capital market
than the new Companies and may borrow funds from the external sources
if there arises any need. Such Companies may have a better dividend
pay-out ratio. Whereas smaller firms have to depend on their
internal sources and therefore they will have to built up good
reserves by reducing the dividend pay out ratio for meeting any
obligation requiring heavy funds.
Policy of Control. Policy
of control is another determining factor is so far as dividends are
concerned. If the directors want to have control on company, they
would not like to add new shareholders and therefore, declare a
dividend at low rate. Because by adding new shareholders they fear
dilution of control and diversion of policies and programmes of the
existing management. So they prefer to meet the needs through
retained earing. If the directors do not bother about the control of
affairs they will follow a liberal dividend policy. Thus control is
an influencing factor in framing the dividend policy.
Repayments of Loan. A
company having loan indebtedness are vowed to a high rate of
retention earnings, unless one other arrangements are made for the
redemption of debt on maturity. It will naturally lower down the
rate of dividend. Sometimes, the lenders (mostly institutional
lenders) put restrictions on the dividend distribution still such
time their loan is outstanding. Formal loan contracts generally
provide a certain standard of liquidity and solvency to be
maintained. Management is bound to hour such restrictions and to
limit the rate of dividend payout.
Time for Payment of Dividend.
When should the dividend be paid is another consideration. Payment
of dividend means outflow of cash. It is, therefore, desirable to
distribute dividend at a time when is least needed by the company
because there are peak times as well as lean periods of expenditure.
Wise management should plan the payment of dividend in such a manner
that there is no cash outflow at a time when the undertaking is
already in need of urgent finances.
15. Regularity and stability in Dividend Payment. Dividends
should be paid regularly because each investor is interested in the
regular payment of dividend. The management should, inspite of
regular payment of dividend, consider that the rate of dividend
should be all the most constant. For this purpose sometimes
companies maintain dividend equalization Fund.