Dividend Policy

Dividend Policy is the policy a company uses to decide how much cash dividends it will pay out to shareholders. The company could also pay in the form of stock dividends which, unlike cash dividends, do not provide liquidity to the investors.

Dividend Policy

Dividend Policy is the policy a company uses to decide how much cash dividends it will pay out to shareholders. The company could also pay in the form of stock dividends which, unlike cash dividends, do not provide liquidity to the investors.  However, a stock dividend ensures capital gains for the stockholders.

The following ratios are called Dividend Policy Ratios as they measure how much a company pays out in dividends relative to its earnings and market value of its shares:  Dividend Payout Ratio and Dividend Yield.   


Dividend Policy Application

The expectations of dividends by shareholders helps them determine the share value, therefore, dividend policy is a significant decision taken by the financial managers of any company.

Companies that pay higher dividends are usually in mature industries where there is little room for growth and paying higher dividends is the best use of profits.  Note that the dividends are not paid from earnings; in fact they are paid from cash. However, the Dividend Payout Ratio compares dividends to the earnings, not to the cash. A company will not be able to pay dividends if it does not have sufficient cash even if it has a high level of earnings.

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