Dimensions of Dividend Policy

Overview of Dimensions of Dividend Policy
The dimensions of dividend policy could be explained as important factors for formulating a dividend policy. These dimensions are more like questions the firms ask themselves when they make the important dividend decisions.

Questions of Dividend Policy
The questions that are normally asked by companies when they make their dividend decisions are regarding the stability of the dividends and the mean payout ratio.

Though both these questions are crucial in the context of making dividend policies they are basically different from each other.

Mean Payout Ratio
The factor of mean payout ratio is an important dimension of any dividend policy.

The dividend payout ratios provided by various business entities are influenced by the following factors:
Taxability
Necessity of Funds
Difference in value of earnings that have been maintained and expenses of external equity
Ability to receive financing from sources that are external
Questions of Control
Choice of the shareholders

The taxability of dividends is an important consideration in the context of dividend policies. Here are certain laws regarding the taxation of the dividends that have to be considered when determining the dividend payout ratio.

The amount of money needed by a firm plays a crucial role while determining the payout ratio of dividends. It has been seen that the companies, which need to reserve funds for investments, offer lower payout ratios for that purpose.

The taste of the shareholders is also considered to be important when taking any decision about the payout ratio. The companies try their best to cater to the needs of the shareholders.
Stability of Dividends
The durability of dividends is important in the context of making dividend policies. There are certain methods, which the companies can follow and make sure that the dividends provided have a certain degree of stability. These methods include the following:
Durable Dividends or Gradually Altering Dividends
Stable Dividend Payout Ratio
There are certain reasons as to why the dividends should be stable:
Dependence of investors on the income made from the dividends
According to institutional investors stability in dividends is a sign of the sign of the stability of the particular firm
Stability of dividends means is reflective of the stability of the company which is issuing the shares

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Last Updated on : 27th June 2013

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