The term dividend refers to that part of profits of a company which is distributed by the company among its shareholders. It is the reward of the shareholders for investments made by them in the shares of the company. The investors are interested in earning the maximum return on their investments and to maximise their wealth.
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A company, on the other hand, needs to provide funds to finance its long-term growth. If a company pays out as dividend most of what it earns, then for business requirements and further expansions it will have to depend upon outside resources such as issue of debt or new shares. Dividend policy of a firm, thus affects both the long-term financing and wealth of shareholders.
Types of Dividend Policy:
1. Regular Dividend Policy:
Payment of dividend at the usual rate is termed as regular dividend. The investors such as retired persons, widows and other economically maker persons prefer to get regular dividends.
2. Stable Dividend Policy:
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The term stability of dividends means consistency or lack of variability in the stream of dividend payments. It may be established in three forms:
(a) Constant dividend per share:
Some companies follow a policy of paying fixed dividend per share irrespective of the level of earnings year after year. Such firms usually create a ‘Reserve for Dividend Equalisation, to enable them pay the fixed dividend even in the year when the earnings are not sufficient.
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(b) Constant payout ratio:
It means payment of a fixed percentage of net earnings as dividends every year. The amount of dividends in such a policy fluctuates in direct proportion to the earnings of the company.
(c) Stable rupee dividend plus extra dividend some companies follow a policy of paying constant low dividend per share plus an extra dividend in the years of high profits.
3. Irregular Dividend Policy:
Same companies follow irregular dividend payments on account of the following:
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(a) Uncertainty of earnings
(b) Unsuccessful business operations.
(c) Lack of liquid resources.
(d) Fear of adverse effects of regular dividends on the financial standing of the company.
4. No Dividend Policy:
A company may follow a policy of paying no dividends presently because of its unfavourable working capital position or on account of requirements of funds for future expansion and growth.