Dividend policy

Dividend policy.

Objectives. Introduction Why is dividend policy so interesting? What are the benefits of a dividend policy? Theories of Dividend policy Finding Methodology Conclusion.

Introduction. A dividend policy is the policy a company uses to structure its dividend payout to shareholders. Some researchers suggest the dividend policy is irrelevant, in theory, because investors can sell a portion of their shares or portfolio if they need funds. This is the dividend irrelevance theory , which infers that dividend payouts minimally affect a stock's price.

Why is dividend policy so interesting?. One reason is that deciding on the amount of earnings to pay out as dividends is one of the major financial decisions that a firm's managers face. Another is that a proper understanding of dividend policy is crucial for many other areas of financial economics. In particular, theories of asset pricing, capital structure, mergers and acquisitions, and capital budgeting all rely on a view of how and why dividends are paid..

What are the benefits of a dividend policy?. The dividend policy equally benefits the company and the shareholders in the following ways: For companies: Shareholders exhibit more trust in the company that pays periodic dividends over a non-dividend paying company. Regular dividend payments attract investors who want to invest in robust businesses and earn a steady income through dividends. Paying periodic dividends throws good light on the financials of the company..

For shareholders:. The dividend policy clearly and transparently states the terms of dividend distribution between the shareholders and the company. Shareholders of a dividend stock can earn dual income. By having period dividends distributed, the shareholders can be confident about the company’s financials..

METHODOLOGY. This section is centered on the methodology that was adopted in this study. It addresses issues relating to the research design, population and sample, data sources, description of variables in the models, model specification, and method of data analysis ..

Finding. the findings indicate that while dividend capacity and free cash flow savings are positively connected with firm performance, dividend payout detrimentally affects owners’ wealth during crisis periods. The findings divulged a detrimental effect of financial sector clean-ups on the performance of non-financial firms only. It is recommended that corporations maintain a balance between dividend payout and free cash flow savings to attract all classes of investors..

Conclution. The firm paying out dividends is obviously generating incomes for an investor, however even if the firm takes some investment opportunity then the incomes of the investors rise at a later stage due to this profitable investment..