1

DIVIDLND DLCISICNS
MLANING CI DIVIDLND
1he Lerm dlvldend refers Lo Lhe person of Lhe proflL whlch ls
dlsLrlbuLed among Lhe owner/ share owners of Lhe flrm 1he
lnsLlLuLe of charLered accounLanLs of lndla deflnes dlvldends ls
``a dlsLrlbuLlon Lo shareholder ouL of proflLs or reserves
avallable for Lhe purpose"
ICkMS CI DIVIDLNDS
ulvldend ordlnarlly ls a dlsLrlbuLlon of proflL earned by a [olnL
sLock company among lLs shareholders MosLly dlvldends are
pald ln cash Lhere are oLher forms such as scrlp dlvldend
debenLures sLock dlvldend and ln an unusual clrcumsLances
properly dlvldends
1Cash d|v|dend
1he paymenL of dlvldend Lo Lhe shareholders ln Lhe flrm of
cash ouL of LoLal earnlngs Whlch Lhe company pay
dlvldend ln Lhe cash lL should see Lhe flrm llquldlLy poslLlon
ls noL adversely affecLed 1he cash dlvldend declared by
Lhe company aL Lhe end of Lhe flnanclal year
Scr|p d|v|dend
ulvldend can be earned only ouL of proflLs earned ln Lhe
parLlcular year or ln pasL reflecLed ln Lhe company
accumulaLed reserves roflLs do noL necessarlly mean


adequaLe cash Lo enable paymenL of cash dlvldends ln
case of company does noL have a comforLable cash
poslLlon lL may lssue promlssory noLes ln few monLhs lL
may also lssue converLlble v dlvldend warranLs
redeemable ln a few years
Debenture d|v|dends
ompany may also lssue debenLures ln lleu of dlvldends Lo
Lhe shareholders 1hese debenLures bear lnLeresL and are
payable afLer a prescrlbed perlod lL ls [usL llke a creaLlng a
long Lerm debL such a pracLlce ls noL common
nds d|v|dends
lL ls slmllar Lo scrlp dlvldend ln Lhls case lnsLead of cash
paymenL company lssue dlvldend ln Lhe form of bonds
whlch promlses Lo pay Lhe declared dlvldend aL Lhe fuLure
speclfled daLe 8egular lnLeresL ls pald Lo Lhe bond holds
unLll Lhe bond are pald ln Lhe money on speclfled due
daLe 1he bond dlvldend resulLs ln addlLlonal burden Lo Lhe
company slnce lL has Lo pay lnLeresL
9rperty d|v|dends
1hls form of dlvldend ls unusual Such dlvldend may be ln
Lhe form of lnvenLory of securlLles ln lleu of cash paymenL
A company someLlmes may hold shares of Lhe oLhers
companles example lLs subsldlarles whlch lL may llke Lo
dlsLrlbuLe among lLs own shareholders lnsLead of paylng
dlvldend ln cash ln case Lhe company sells Lhese shares lL


may have Lo pay caplLal galns whlch may be sub[ecL Lo
LaxaLlon lf Lhese shares are Lransferred Lo lLs
shareholders Lhere ls no Lax llablllLy



Cpt|na| d|v|dend
1he dlvldend whlch ls payable ln elLher ln cash or ln shares
aL Lhe opLlon of shareholders 8uL Lhls opLlon Lo a large
exLenL depends upon Lhe llquldlLy poslLlon worklng caplLal
requlremenL managemenL pollcy lnflaLlonary and
deflaLlonary slLuaLlons revalllng ln Lhe economy
lnLeresL raLe age of Lhe company and so on
nus shares r stck d|v|dends
lnsLead of paylng dlvldends ouL of accumulaLed reserves
Lhe laLLer may be caplLallzed by lssue of bonus shares Lo
Lhe shareholders 1hus whlle Lhe funds conLlnue Lo
remaln wlLh Lhe company Lhe shareholders acqulre Lhe
rlghL and Lhls way Lhelr markeLable equlLy lncreases 1hey
can elLher reLaln Lhelr bonus shares and Lhus be enLlLled Lo
lncreased LoLal dlvldend or can sell Lhelr bonus shares and
reallze cash Crdlnarlly bonus shares are noL lssued ln lleu
of dlvldends 1hey are perlodlcally lssued by prosperous
companles ln addlLlon Lo usual dlvldends erLaln


guldellnes as lald down by Lhe governmenL are appllcable
for lssue of bonus shares ln lndla
DIVIDLND 9CLIC
IAC1CkS AIILC1ING DIVIDLND 9CLIC
A number of facLors affecL Lhe dlvldend pollcy of a
company 1he ma[or facLors are as follows
1
Stab|||ty Larn|ngs
8uslness unlLs havlng sLablllLy of earnlngs may
formulaLe a more conslsLenL dlvldend pollcy Lhan Lhe
flrms havlng an uneven flow of lncome usually flrms
deallng ln necesslLles suffer less Lhan osclllaLlng lncomes
Lhan flrms deallng ln fancy goods
Age bus|ness un|t
A newly esLabllshed company requlres more funds for
expanslon and may adopL a rlgld dlvldend pollcy whlle
aged company can formulaLe more conslsLenL dlvldend
pollcy
Des|re cntr|
1he lssue of addlLlonal equlLy shares for procuremenL of
funds dlluLes conLrol Lo Lhe deLrlmenL of Lhe exlsLlng
equlLy shareholders who have a volce ln Lhe company ln
case of a sLrong deslre for conLrol Lhe managemenL
prefer Lo pay smaller dlvldend
L|qu|d|ty ps|t|n


1he paymenL of dlvldends resulLs ln cash ouL flow from
a flrm A flrm may have adequaLe earnlng buL lL may noL
have sufflclenL cash Lo pay dlvldends Pence Lhe
managemenL Lo Lake lnLo accounLs Lhe cash poslLlon of
Lhe flrm before and afLer Lhe paymenL of dlvldend whlle
Laklng Lhe dlvldend declslon
Des|re the shareh|ders
1he company should also conslder Lhe deslre of
shareholders before Lhe paymenLs of dlvldends
shareholders expecL Lwo form of reLurn from Lhe flrm
namely caplLal galns and dlvldends ln mosL cases Lhe
shareholders deslre Lo earn caplLal galn because Lhey
requlre lncome from Lhe lnvesLmenL Lo pay for Lhelr
currenL llvlng expenses
Genera| state ecny
1he general sLaLe of economy affecLs Lo a greaL exLenL
Lhe managemenL`s declslon Lo reLaln or dlsLrlbuLe
earnlngs of Lhe flrm ln case of uncerLaln economlc and
buslness condlLlons Lhe managemenL may llke Lo reLaln
Lhe whole or a parL of Lhe flrm`s earnlngs Lo absorb
shocks ln Lhe fuLure ln perlods of depresslon also Lhe
managemenL may wlLh hold proflLs Lo preserve Lhe
flrm`s llquldlLy poslLlon ln perlod of prosperlLy Lhe
managemenL may also reLaln Lhe lnvesLmenL ln large
proflLable lnvesLmenL opporLunlLles Slmllarly ln perlods


of lnflaLlon Lhe flrm may reLaln dlvldend paymenLs ln
order Lo replace worn asseLs
State cap|ta| arket
ln case a flrm has an easy access Lo Lhe caplLal markeL
because favorable condlLlons prevall ln Lhe caplLal
markeL lL can follow a llberal dlvldend pollcy lf lL has no
easy access Lo caplLal markeL because of unfavorable
condlLlons ln Lhe caplLal markeL lL ls llkely Lo adopL
conservaLlve dlvldend pollcy
Need r the add|t|na| cap|ta|
ompanles reLaln a parL of Lhelr proflLs for
sLrengLhenlng Lhelr flnanclal poslLlon 1he lncome may
be uLlllzed for meeLlng Lhe lncreased requlremenLs of
worklng caplLal or fuLure expanslon
10 Gvernent p||c|es
1he dlvldend pollcy ls wldely affecLed by Lhe changes ln
flscal lndusLrlal labour and oLher CovernmenL pollcles
SomeLlmes governmenL resLrlcLs Lhe dlsLrlbuLlon of
dlvldend beyond a cerLaln percenLage ln all spheres of
buslness acLlvlLy 1he dlvldend pollcy has Lo be modlfled
accordlngly
11 Lega| requ|reents
ln order Lo proLecL Lhe lnLeresLs of credlLors and
ouLslders Lhe company acL 19 prescrlbes cerLaln
guldellnes for paymenL dlvldend Slmllarly Lhe lndlan


lncome 1ax AcL also lays down cerLaln resLrlcLlon on
paymenLs of dlvldends 1he managemenL has Lo Lake
lnLo accounL all legal resLrlcLlons before Laklng Lhe
dlvldend declslon
1 1ax p||cy
1he Lax pollcy followed by CovL also affecLs Lhe dlvldend
pollcy Plgh raLe of Laxes reduce Lhe earnlngs of Lhe
companles and consequenLly Lhe raLe of dlvldend ls
lowered down
1 9ast d|v|dend rates
Whlle formulaLlng Lhe dlvldend pollcy Lhe dlrecLors
musL keep ln mlnd Lhe dlvldend pald ln pasL years ln a
new company lL should conslder Lhe dlvldend pollcy of
Lhe revlval flrms
1 Ab|||ty t brr
Well esLabllshed flrms have beLLer access Lo Lhe caplLal
markeL Lhan new concerns and may borrow funds from
oLher exLernal sources lf Lhere arlses any such need
such companles may have a beLLer dlvldend payouL
raLlo Cn Lhe oLher hand smaller flrms have Lo depend
on Lhelr lnLernal sources and Lherefore Lhelr payouL
raLlo wlll be less
1 9||cy cntr|
lf Lhe dlrecLors wanL Lo have conLrol on companles Lhey
would noL llke Lo add new shareholders Lherefore


declare a dlvldend aL lower raLe because by addlng new
shareholders Lhey fear dlluLlon of conLrol of Lhe exlsLlng
managemenL lf Lhey don`L boLher abouL Lhe conLrol
Lhey wlll follow llberal dlvldend pollcy



1 kepayent |an
A company faces repaymenL of loans lL wlll naLurally
lower down Lhe raLe of dlvldends SomeLlmes Lhe lender
puL resLrlcLlon on Lhe dlvldend dlsLrlbuLlons Llll such
Llme Lhelr loan ls ouLsLandlng

S1AILI1 CI DIVIDLNDS
SLablllLy or regularlLy of dlvldends ls consldered as a
deslrable pollcy by Lhe managemenL of Lhe mosL
companles Shareholders also generally favor Lhls pollcy
and value sLable dlvldends hlgher Lhan flucLuaLlng ones
All oLher Lhlngs belng Lhe same sLable dlvldend may
have a poslLlve lmpacL on Lhe markeL prlce of Lhe share
SLablllLy of dlvldends someLlmes means regularlLy ln
paylng some dlvldend annually even Lhough Lhe
amounL of dlvldend may flucLuaLe from year and may
noL be relaLed wlLh earnlngs
9

1here are a number of companles whlch have records of
paylng dlvldend for a long unbroken perlod More
preclsely sLablllLy of dlvldends refers Lo Lhe amounL
pald ouL regularly 1hree dlsLlncL forms of such sLablllLy
may be dlsLlngulshed
onsLanL dlvldend per share or dlvldend raLe
onsLanL payouL
onsLanL dlvldend per share plus exLra dlvldend