dividend policy

Examples of dividend policy in the following topics:

• Impact of Dividend Policy on Clientele

  • Change in a firm's dividend policy may cause loss of old clientele and gain of new clientele, based on their different dividend preferences.
  • Suppose Firm A had been in a growth stage and did not offer dividends to its shareholders, but their policy changed to paying low cash dividends.
  • On the other hand, the firm may attract a new clientele group if its new dividend policy appeals to the group's dividend preferences.
  • This is true as long as the "market" for dividend policy is in equilibrium, where demand for such a policy meets the supply.
  • The clientele effect's real world implication is that what matters is not the content of the dividend policy, but rather the stability of the policy.

• Investor Preferences

  • The significance of investors' dividend preferences is a contested topic in finance that has serious implications for dividend policy.
  • Assuming dividend relevance, coming up with a dividend policy is challenging for the directors and financial manager of a company because different investors have different views on present cash dividends and future capital gains.
  • Further elements of the dividend policy also include:1.
  • Stable versus irregular dividends, and 3.
  • Therefore, the content of a firm's dividend policy has no real effect on the value of the firm.

• Residual Dividend Model

  • The Residual Dividend Model first uses earnings to finance new projects, then distributes the remainder as dividends.
  • The Residual Dividend Model is a method a company uses to determine the dividend it will pay to its shareholders.
  • The Residual Dividend Model is an outgrowth of The Modigliani and Miller Theory that posits that dividends are irrelevant to investors.
  • It goes on to say that dividend policy does not determine market value of a stock.
  • The Residual Model dividend policy is a passive one and, in theory, does not influence market price because the same wealth is created for the investor regardless of the dividend.

• Dividend Irrelevance Theory

  • It does not matter if the firm's capital is raised by issuing stock or selling debt, nor does it matter what the firm's dividend policy is.
  • Dividend irrelevance follows from this capital structure irrelevance.
  • However, the total return from both dividends and capital gains to stockholders should be the same.
  • If dividends are too small, a stockholder can simply choose to sell some portion of his stock.
  • However, the importance of a firm's dividend decision is still contested, with a number of theories arguing for dividend relevance.

• Signaling

  • A dividend decision may have an information signalling effect that firms will consider in formulating their policy.
  • When investors have incomplete information about the firm (perhaps due to opaque accounting practices) they will look for other information in actions like the firm's dividend policy.
  • For instance, when managers lack confidence in the firm's ability to generate cash flows in the future they may keep dividends constant, or possibly even reduce the amount of dividends paid out.
  • This, in turn, may influence the dividend decision as managers know that stock holders closely watch dividend announcements looking for good or bad news.
  • As managers tend to avoid sending a negative signal to the market about the future prospects of their firm, this also tends to lead to a dividend policy of a steady, gradually increasing payment.

• Stock Dividends vs. Cash Dividends

  • Stock dividends, unlike cash dividends, do not provide liquidity to the investors; however, they do ensure capital gains to the stockholders.
  • Cash dividends are immediately taxable under most countries' tax codes as income, while stock dividends are not taxable until sold for capital gains (if stock was the only choice for receiving dividends).
  • A further benefit of the stock dividend is its perceived flexibility.
  • For the firm, dividend policy directly relates to the capital structure of the firm, so choosing between stock dividends and cash dividends is an important consideration.
  • The needs and cash flow of the firm are necessary points of consideration in choosing a dividend policy.

• Expected Dividends, No Growth

  • A no-growth company would be expected to return high dividends under traditional finance theory.
  • This suggests that a particular pattern of dividend payments may suit one type of stock holder more than another; this is sometimes called the "clientele effect. " A retiree may prefer to invest in a firm that provides a consistently high dividend yield, whereas a person with a high income from employment may prefer to avoid dividends due to their high marginal tax rate on income.
  • This model may help to explain the relatively consistent dividend policies followed by mostlisted companies.
  • No growth, high dividend stocks may appeal to value investors.
  • Describe how a company should make a dividend decision when it expect no growth

• Value of a Low Dividend

  • Furthermore, capital gains are taxed at lower rates than dividends.
  • However, under dividend irrelevance theory, the actual value of a dividend is inconsequential to investors.
  • The conflicting theories on dividend policy complicate interpretations of low dividends in real life.
  • If a stock has a low dividend yield, this implies that the stock's market price is considerably higher than the dividend payments a shareholder gets from owning the stock.
  • Conversely, a low dividend yield can be considered evidence that the firm is experiencing rapid growth or that future dividends might be higher.

• The Nature of Dividends

  • While companies experiencing rapid growth are unlikely to offer dividends, established companies with stable business and less room to grow do pay dividends to shareholders.
  • They can still profit off a steady stream of dividend payments.
  • When managers lack confidence in the firm's ability to generate cash flows in the future they may keep dividends constant or possibly even reduce the amount of dividends paid out.
  • This, in turn, may influence the dividend decision as managers know that stock holders closely watch dividend announcements looking for good or bad news.
  • This also tends to lead to a dividend policy of a steady, gradually increasing payment .

• Dividend Preference

  • Unlike common stock, which has no set maximum or minimum dividend, the dividend return on preferred stock is usually stated at an amount per share or as a percentage of par value.
  • Therefore, the firm fixes the dividend per share.
  • If both types of stock exist, common stock holders cannot be paid dividends until all preferred stock dividends (including payments in arrears) are paid in full.
  • Holders of common stock are able to influence the corporation through votes on establishing corporate objectives and policy, stock splits, and electing the company's board of directors.
  • Preferred stock usually carries no voting rights, but may carry a dividend and may have priority over common stock upon liquidation, and in the payment of dividends.