A dividend policy is a set of guidelines or rules a company follows when deciding how much of its profits to distribute to its shareholders as dividends.
In India, the dividend policy is determined by the company's Board of Directors, considering the company's financial performance, future investments, capital requirements, and other factors.
Example: Here's a dividend policy of MSTC Limited, a government-owned e-commerce enterprise.
The objectives of a dividend policy in a company are multifaceted and can vary depending on the organization's goals and circumstances. However, some common objectives include:
A company will declare a dividend only if it has made a profit. The company's profits also determine the proportion of dividends distributed among the shareholders.
Generally, a company with a history of paying dividends to its shareholders keeps its dividend amount stable. These are dividend stocks where most investors park their money to earn a regular dividend income.
A business might retain its profits if it has plans to reinvest them to expand. However, if the company's retained earnings are enough to fund its expansion, it may pay dividends.
Companies might match the dividend trends that exist in their industry to retain their shareholders.
A company's dividend policy determines the pattern of dividend distribution. Here are 4 ways in which dividends are distributed in India:
In this pattern, shareholders receive a fixed dividend amount occasionally. This stability in distributing dividends is unaffected by the earnings of the company. With this dividend policy, the company pays shareholders a dividend even if they are making losses.
Here are a few mutual funds that can get you assured dividends.
Companies following a regular dividend pattern fix a percentage of their profits to be given as dividends. With a higher yield, the company pays a higher and lower dividend when it makes a smaller profit.
Here, the company decides to pay a special dividend to the shareholders — on a case-to-case basis. The company chooses the dividends per its priority. For example, if the company plans to expand, it might reinvest its profits and decide not to pay dividends.
A company following a no-dividend policy retains all its profits and does not distribute them among its shareholders.
If a company has decided to pay dividends to its shareholders, the next crucial decision it needs to make is the dividend payout ratio. The dividend payout ratio measures how much you can get for each of the shares you hold.
EPS is a figure that describes the profit amount per share of the company. Companies must also decide what form of dividend they will payout to shareholders. There are four major types of dividends.
Dividends can be given by granting additional shares to existing shareholders. A company can issue less than one-fourth of its previously issued stock in stock dividends. However, if the company provides additional shares in the form of a stock split, it can surpass this limit.
Cash dividends are amongst the popular forms of dividends in India. Here, the company pays its shareholders a fixed amount per share. For example, if the dividend rate is 5% and you have 100 shares of the company, your cash dividend value would be 5 x ₹100 = ₹500.
Sometimes, a company issues a non-financial dividend to its shareholders, such as a property dividend. These dividends can include giving shares of a subsidiary company (another company under a parent brand) as dividends. The value of the property dividend is considered against the asset's current market price. For example, Marvel Entertainment is a subsidiary of Walt Disney Entertainment. If Disney gives Marvel's shares as dividends, they are called property dividends.
A scrip dividend is an 'I-owe-you' note that a company issues to its shareholders when it does not have enough dividends. This promissory note indicates that the company will pay dividends to its shareholders later. These dividends are usually cash dividends.
Note: Apart from these four types, a company might also pay liquidating dividends to its shareholders when it is wrapping up its business to return the capital invested by the shareholders.
Before investing in dividend-providing companies, shareholders must consider the company's dividend policy. Factors such as profitability, dividend payment history, growth plans, industry trends, and availability of funds influence the dividend policy. By understanding these concepts and the patterns of dividend distribution, investors (like you) can make informed decisions and maximise their returns.
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A company's dividend policy is a guideline to determine the type, period and pattern of distributing dividends. The factors that impact a company's dividend policy are:
The dividend policy is used to decide on the dividend payout ratio of a company. The dividend payout ratio of a company is calculated as the annual dividend per share divided by Earnings Per Share (EPS).
The dividend policy equally benefits the company and the shareholders in the following ways:
For companies:
For shareholders:
The three types of dividends are -
Stock dividends: Dividends can be given in the form of granting additional shares to existing shareholders.
Cash dividends: The company pays a fixed amount per share to its shareholders.
Property dividends: These can include shares of a subsidiary company (another company under a parent brand) as dividends.
