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    Objectives of The Dividend Policy

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    2801 Dewan Foysal Haque
    The objectives of a dividend policy are to distribute dividends to shareholders while preserving retained earnings to maximize shareholder wealth through company growth. However, these objectives conflict as higher dividends reduce retained earnings and growth, while lower dividends increase retained earnings and growth. A company's dividend policy depends on many factors, including funds liquidity, past dividend rates, earnings stability, debt obligations, investment opportunities, shareholders' expectations, the company's size and nature, its financial policy, the impact of economic cycles, its ability to borrow, legal restrictions, taxation policy, government policy, and profitability.

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    Objectives of The Dividend Policy

    Uploaded by

    2801 Dewan Foysal Haque
    302 views2 pages
    The objectives of a dividend policy are to distribute dividends to shareholders while preserving retained earnings to maximize shareholder wealth through company growth. However, these objectives conflict as higher dividends reduce retained earnings and growth, while lower dividends increase retained earnings and growth. A company's dividend policy depends on many factors, including funds liquidity, past dividend rates, earnings stability, debt obligations, investment opportunities, shareholders' expectations, the company's size and nature, its financial policy, the impact of economic cycles, its ability to borrow, legal restrictions, taxation policy, government policy, and profitability.

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    DIVIDEND POLICY

    Original Title

    DIVIDEND POLICIES

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    The objectives of a dividend policy are to distribute dividends to shareholders while preserving retained earnings to maximize shareholder wealth through company growth. However, these objectives conflict as higher dividends reduce retained earnings and growth, while lower dividends increase retained earnings and growth. A company's dividend policy depends on many factors, including funds liquidity, past dividend rates, earnings stability, debt obligations, investment opportunities, shareholders' expectations, the company's size and nature, its financial policy, the impact of economic cycles, its ability to borrow, legal restrictions, taxation policy, government policy, and profitability.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    302 views2 pages

    Objectives of The Dividend Policy

    Uploaded by

    2801 Dewan Foysal Haque
    The objectives of a dividend policy are to distribute dividends to shareholders while preserving retained earnings to maximize shareholder wealth through company growth. However, these objectives conflict as higher dividends reduce retained earnings and growth, while lower dividends increase retained earnings and growth. A company's dividend policy depends on many factors, including funds liquidity, past dividend rates, earnings stability, debt obligations, investment opportunities, shareholders' expectations, the company's size and nature, its financial policy, the impact of economic cycles, its ability to borrow, legal restrictions, taxation policy, government policy, and profitability.

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    of 2

    Objectives of the Dividend Policy:

    To distribute dividend to the shareholder

    To preserve retained earnings to maximization of shareholder wealth through company


    growth.

    Above two objectives there are conflicting effects. Because if higher dividend is paid,
    Retained Earnings will be reduced. As a result, internal assets use will hamper and
    growth also reduce. On the other hand, if distribute less dividend then increase retained
    Earnings. As a result, increase internal assets use and increase growth of the company.

    Conflicting effect: Higher dividend= Retained Earning Reduce

    Lower dividend= Retained Earnings increase

    Factors Affecting Dividend Policy:


    Many a time we wonder how a company frames its dividend policy?

    These dividend decisions of an organization are dependent upon the following


    determinants:

    Funds Liquidity: It should be framed in consideration of retaining adequate working


    capital and surplus funds for the uninterrupted business functioning.

    Past Dividend Rates: There should be a steady rate of return on dividends to maintain
    stability; therefore previous year’s allowed return is given due consideration.

    Earnings Stability: When the earnings of the company are stable and show profitability,
    the company should provide dividends accordingly.

    Debt Obligations: The organization which has leveraged funds through debts need to
    pay interest on borrowed funds. Therefore, such companies cannot pay a fair dividend to
    its shareholders.

    Investment Opportunities: One of the significant factors of dividend policy decision


    making is determining the future investment needs and maintaining sufficient surplus
    funds for any further project.

    Control Policy: When the company does not want to increase the shareholders’ control
    over the organization, it tries to portray the investment to be unattractive, by giving out
    fewer dividends.
    Shareholders’ Expectations: The investment objectives and intentions of the
    shareholders determine their dividend expectations. Some shareholders consider
    dividends as a regular income, while the others seek for capital gain or value appraisal.

    Nature and Size of Organization: Huge entities have a high capital requirement for
    expansion, diversification or other projects. Also, some business may require enormous
    funds for working capital and other entities require the same for fixed assets. All this
    impacts the dividend policy of the company.

    Company’s Financial Policy: If the company’s financial policy is to raise funds through
    equity, it will pay higher dividends. On the contrary, if it functions more on leveraged
    funds, the dividend payouts will always be minimal.

    Impact of Trade Cycle: During inflation or when the organization lacks adequate funds
    for business expansion, the company is unable to provide handsome dividends.

    Borrowings Ability: The Company’s with high goodwill has excellent credibility in the
    capital as well as financial markets. With a better borrowing capability, the organization
    can give decent dividends to the shareholders.

    Legal Restrictions: In India, the Companies Act 1956 legally abides the organizations to
    pay dividends to the shareholders; thus, resulting in higher goodwill.

    Corporate Taxation Policy: If the organization has to pay substantial corporate tax or
    dividend tax, it would be left with little profit to pay out as dividends.

    Government Policy: If the government intervenes a particular industry and restricts the
    issue of shares or debentures, the company’s growth and dividend policy also gets
    affected.

    Divisible Profit: The last but a crucial factor is the company’s profitability itself. If the
    organization fails to generate enough profit, it won’t be able to give out decent dividends
    to the shareholders.

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