Types of Dividend Policies

Posted by blogger | Friday, January 29, 2010 | Dividend | 0

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The following are various types of dividend policies
(1) Policy of No Immediate Dividend
(2) Stable Dividend Policy.
(3) Regular Dividend plus Extra Dividend Policy.
(4) Irregular Dividend Policy.
(5) Regular Stock Dividend Policy.
(6) Regular Dividend plus Stock Dividend Policy.
(7) Liberal Dividend Policy.

We discuss these policies in detail:

(1) Policy of No Immediate Dividend: Generally,

management follows a policy of paying no immediate
dividend in the beginning of its life, as it requires funds for
growth and expansion. In case, when the outside funds are
costlier or when the access to capital market is difficult for
the company and shareholders are ready to wait for
dividend for sometime, this policy is justified, provided the
company is growing fast and it requires a good deal of
amount for expansion. But such a policy is not justified for a
long time, as the shareholders are deprived of the dividend
and the retained earnings built up which will attract attention
of laborers, consumers etc. It would be better if the period of
dividend is followed by issue of bonus shares, so that later
on rate of dividend is maintained at a reasonable level.

(2) Regular or Stable Dividend Policy: When a company

pays dividend regularly at a fixed rate, and maintains it for a
considerably long time even though the profits may
fluctuate, it is said to follow regular or stable dividend policy.
Thus stable dividend policy means a policy of paying a
minimum amount of dividend every year regularly. It raises
the prestige of the company in the eyes of the investors. A
firm paying stable dividend can satisfy its shareholders and
can enhance its credit standing in the market. Not only that
the dividend must be regularly paid but the dividend must be
stable. It may be fixed amount per share or a fixed
percentage of net profits or it may be total fixed amount of
dividend on all the shares etc. The benefits of stable
dividend policy are (i) it helps in raising long-term finance.
When the company tries to raise finance in future, the
investors would examine the dividend record of the
company. The investors would not hesitate to invest in
company with stable dividend policy. (2) As it will enhance
the prestige of the company, the price of its shares would
remain at a high level. (3) The shareholders develop
confidence in management. (4) It makes long-term planning
easier. (The detailed discussion of this policy follows in the
next paragraph.

(3) Regular Dividend plus Extra Dividend Policy. A firm

paying regular dividends would continue with its pay out
ratio. But when the earnings exceed the normal level, the
directors would pay extra dividend in addition to the regular
dividend. But it would be named 'Extra dividend', as it
should not give an impression that the company has
enhanced rate of regular dividend, This would give an
impression to shareholders that the company has given
extra dividend because it has earned extra profits and would
not be repeated when the business earnings become
normal. Because of this policy, the company's prestige and
its share values will not be adversely affected. Only when
the earnings of the company have permanently increased,
the extra dividend should be merged with regular normal
dividend and thus rate of normal dividend should be raised.
Besides, the extra dividend should not be abruptly declared,
but the shareholders should have some idea in advance, so
that they may sell their shares, if they like. This system is
not found in India.

(4) Irregular Dividend Policy: When the firm does not pay
out fixed dividend regularly, it is irregular dividend policy. It
changes from year to year according to changes in earnings
level. This policy is based on the management belief that
dividend should be paid only when the earnings and liquid
position of the firm warrant it. This policy is followed by firms
having unstable earnings, particularly engaged in luxury
goods.

(5) Regular Stock Dividend Policy: When a firm pays

dividend in the form of shares instead of cash regularly for
some years continuously, it is said to follow this policy. We
know stock dividend as bonus shares. When a company is
short of cash or is facing liquidity crunch, because a large
part of its earnings are blocked in high level of receivables
or when the company is need of cash for its modernization
and expansion program, it follows this policy. It is not
advisable to follow this policy for a long time, as the number
of shares will go on increasing, which would result in fall in
earnings per share. This would adversely affect the credit
standing of the firm and its share values will go down.

(6) Regular Dividend plus Stock Dividend Policy: A firm may

pay certain amount of dividend in cash and some dividend is paid
in the form of shares (stock). Thus, the dividend is split in to two
parts. This policy is justified when (1) The company wants to
maintain its policy of regular dividend and yet (2) It wants to
retain some part of its divisible profit with it for expansion. (3) It
wants to give benefit of its earnings to shareholders but has not
enough liquidity to give full dividend in cash. All the limitations
of paying regular stock dividends apply to this policy.
 (7) Liberal Dividend Policy: It is a policy of distributing a major
part of its earnings to its shareholders as dividend and retains a
minimum amount as retained earnings. Thus, the ratio of dividend
distribution is very large as compared to retained earnings. The
rate of dividend or the amount of dividend is not fixed. It varies
according to earnings. The higher is the profit, the higher will be
the rate of dividend. In years of poor earnings, the rate of dividend
will be lower. In fact, it is the policy of Irregular Dividend.

Types of divident

(1) Regular Dividend. By dividend we mean regular dividend

paid annually, proposed by the board of directors and approved by the
shareholders in general meeting. It is also known as final dividend
because it is usually paid after the finalization of accounts. It sis
generally paid in cash as a percentage of paid up capital, say 10 % or
15 % of the capital. Sometimes, it is paid per share. No dividend is paid
on calls in advance or calls in arrears. The company is, however,
authorised to make provisions in the Articles prohibiting the payment
of dividend on shares having calls in arrears.

(2) Interim Dividend. If Articles so permit, the directors may decide to

pay dividend at any time between the two Annual General Meeting
before finalizing the accounts. It is generally declared and paid when
company has earned heavy profits or abnormal profits during the year
and directors which to pay the profits to shareholders. Such payment of
dividend in between the two Annual General meetings before finalizing
the accounts is called Interim Dividend. No Interim Dividend can be
declared or paid unless depreciation for the full year (not
proportionately) has been provided for. It is, thus,, an extra dividend
paid during the year requiring no need of approval of the Annual
General Meeting. It is paid in cash.

(3) Stock-Dividend. Companies, not having good cash position,

generally pay dividend in the form of shares by capitalizing the profits
of current year and of past years. Such shares are issued instead of
paying dividend in cash and called 'Bonus Shares'. Basically there is no
change in the equity of shareholders. Certain guidelines have been used
by the company Law Board in respect of Bonus Shares.

(4) Scrip Dividend. Scrip dividends are used when earnings justify a
dividend, but the cash position of the company is temporarily weak. So,
shareholders are issued shares and debentures of other companies. Such
payment of dividend is called Scrip Dividend. Shareholders generally
do not like such dividend because the shares or debentures, so paid are
worthless for the shareholders as directors would use only such
investment is which were not . Such dividend was allowed before
passing of the Companies (Amendment) Act 1960, but thereafter this
unhealthy practice was stopped.

(5) Bond Dividends. In rare instances, dividends are paid in the form
of debentures or bounds or notes for a long-term period. The effect of
such dividend is the same as that of paying dividend in scrips. The
shareholders become the secured creditors is the bonds has a lien on
assets.

(6) Property Dividend. Sometimes, dividend is paid in the form of

asset instead of payment of dividend in cash. The distribution of
dividend is made whenever the asset is no longer required in the
business such as investment or stock of finished goods.

But, it is, however, important to note that in India, distribution of

dividend is permissible in the form of cash or bonus shares only.
Distribution of dividend in any other form is not allowed.