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DIVIDEND DECISIONS
MEANING OF DIVIDEND:The term dividend refers to the person of the profit which is distributed
among the owner/ share owners of the firm. The institute of chartered
accountants of India defines, dividends is ``a distribution to shareholder out
of profits or reserves available for the purpose
FORMS OF DIVIDENDS:Dividend ordinarily is a distribution of profit earned by a joint stock company
among its shareholders. Mostly dividends are paid in cash, there are other
forms such as scrip dividend debentures, stock dividend, and in an unusual
circumstances, properly dividends.
1. Cash dividend:
The payment of dividend to the shareholders in the firm of cash out of
total earnings. Which the company pay dividend in the cash it should
see the firm liquidity position is not adversely affected .The cash
dividend declared by the company at the end of the financial year.
2. Scrip dividend:
Dividend can be earned only out of profits earned in the particular year
or in past reflected in the company accumulated reserves. Profits do
not necessarily mean adequate cash to enable payment of cash
dividends. In case of company does not have a comfortable cash
position it may issue promissory notes in few months. It may also issue
convertible v dividend warrants redeemable in a few years.
3. Debenture dividends:
Company may also issue debentures in lieu of dividends to the
shareholders. These debentures bear interest and are payable after a
prescribed period. It is just like a creating a long term debt such a
practice is not common.
4. Bonds dividends:
It is similar to scrip dividend. In this case, instead of cash payment
company issue dividend in the form of bonds which promises to pay
the declared dividend at the future specified date. Regular interest is
paid to the bond holds until the bond are paid in the money on
specified due date. The bond dividend results in additional burden to
the company since it has to pay interest.
5. Property dividends:
This form of dividend is unusual. Such dividend may be in the form of
inventory of securities in lieu of cash payment. A company sometimes
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may hold shares of the others companies, example its subsidiaries

which it may like to distribute among its own shareholders, instead of
paying dividend in cash. In case the company sells these shares it may
have to pay capital gains which may be subject to taxation. If these
shares are transferred to its shareholders, there is no tax liability.

6. Optional dividend:
The dividend which is payable in either in cash or in shares at the
option of shareholders. But, this option to a large extent depends upon
the liquidity position, working capital requirement, management
policy, inflationary and deflationary, situations. Prevailing in the
economy, interest rate, age of the company and so on.
7. Bonus shares or stock dividends:
Instead of paying dividends out of accumulated reserves, the latter
may be capitalized by issue of bonus shares to the shareholders. Thus,
while the funds continue to remain with the company, the shareholders
acquire the right and this way their marketable equity increases. They
can either retain their bonus shares and thus be entitled to increased
total dividend or can sell their bonus shares and realize cash.
Ordinarily, bonus shares are not issued in lieu of dividends. They are
periodically issued by prosperous companies in addition to usual
dividends. Certain guidelines, as laid down by the government, are
applicable for issue of bonus shares in India.
DIVIDEND POLICY
FACTORS AFFECTING DIVIDEND POLICY:
A number of factors affect the dividend policy of a company. The major
factors are as follows
1.
2. Stability of Earnings:
Business units having stability of earnings may formulate a more
consistent dividend policy than the firms having an uneven flow of
income usually firms dealing in necessities suffer less than
oscillating incomes than firms dealing in fancy goods.
3. Age of business unit:
A newly established company requires more funds for expansion
and may adopt a rigid dividend policy while aged company can
formulate more consistent dividend policy.
4. Desire of control:
The issue of additional equity shares for procurement of funds
dilutes control to the detriment of the existing equity shareholders
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who have a voice in the company in case of a strong desire for

control, the management prefer to pay smaller dividend.
5. Liquidity position:
The payment of dividends results in cash out flow from a firm. A firm
may have adequate earning but it may not have sufficient cash to
pay dividends. Hence, the management to take into accounts the
cash position of the firm before and after the payment of dividend
while taking the dividend decision.
6. Desire of the shareholders:
The company should also consider the desire of shareholders before
the payments of dividends shareholders expect two form of return
from the firm namely capital gains and dividends. In most cases the
shareholders desire to earn capital gain because they require
income from the investment to pay for their current living expenses.
7. General state of economy:
The general state of economy affects to a great extent the
management`s decision to retain or distribute earnings of the firm.
In case of uncertain economic and business conditions, the
management may like to retain the whole or a part of the firm`s
earnings to absorb shocks in the future in periods of depression also
the management may with hold profits to preserve the firm`s
liquidity position. In period of prosperity the management may also
retain the investment in large profitable investment opportunities.
Similarly in periods of inflation, the firm may retain dividend
payments in order to replace worn assets.
8. State of capital market:
In case a firm has an easy access to the capital market because
favorable conditions prevail in the capital market it can follow a
liberal dividend policy. If it has no easy access to capital market
because of unfavorable conditions in the capital market, it is likely
to adopt conservative dividend policy.
9. Need for the additional capital:
Companies retain a part of their profits for strengthening their
financial position. The income may be utilized for meeting the
increased requirements of working capital or future expansion.
10. Government policies:
The dividend policy is widely affected by the changes in fiscal,
industrial labour and other Government policies. Sometimes
government restricts the distribution of dividend beyond a certain
percentage in all spheres of business activity. The dividend policy
has to be modified accordingly.
11. Legal requirements:
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In order to protect the interests of creditors and outsiders, the

company act 1956 prescribes certain guidelines for payment
dividend. Similarly, the Indian income Tax Act also lays down certain
restriction on payments of dividends. The management has to take
into account all legal restrictions before taking the dividend
decision.
12. Tax policy:
The tax policy followed by Govt also affects the dividend policy. High
rate of taxes reduce the earnings of the companies and
consequently the rate of dividend is lowered down.
13. Past dividend rates:
While formulating the dividend policy, the directors must keep in
mind the dividend paid in past years in a new company; it should
consider the dividend policy of the revival firms.
14. Ability to borrow:
Well established firms have better access to the capital market than
new concerns and may borrow funds from other external sources if
there arises any such need, such companies may have a better
dividend payout ratio. On the other hand smaller firms have to
depend on their internal sources and therefore their payout ratio will
be less.
15. Policy of control:
If the directors want to have control on companies they would not
like to add new shareholders & therefore declare a dividend at lower
rate because by adding new shareholders they fear dilution of
control of the existing management. If they don`t bother about the
control, they will follow liberal dividend policy.

16. Repayment of loan:

A company faces repayment of loans; it will naturally lower down
the rate of dividends. Sometimes the lender put restriction on the
dividend distributions till such time their loan is outstanding.
STABILITY OF DIVIDENDS
Stability or regularity of dividends is considered as a desirable policy
by the management of the most companies. Shareholders, also
generally favor this policy and value stable dividends higher than
fluctuating ones. All other things being the same, stable dividend
may have a positive impact on the market price of the share.

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Stability of dividends sometimes means regularity in paying some

dividend annually, even though the amount of dividend may
fluctuate from year and may not be related with earnings:
There are a number of companies which have records of paying
dividend for a long unbroken period. More precisely, stability of
dividends refers to the amount paid out regularly. Three distinct
forms of such stability may be distinguished:
Constant dividend per share or dividend rate
Constant payout
Constant dividend per share plus extra dividend.

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