Meaning of Dividend and Dividend Policy
Meaning of Dividend: A dividend is that portion of profits and surplus funds of a company which has actually set aside by a valid act of the company for distribution among its shareholders.
According to ICAI, “Dividend is the distribution to the shareholders of a company from the reserves and profits.”
In the words of S.M. Shah, “Dividend is a part of divisible profits of a business company which is distributed to the shareholders.”
Dividend may be divided into following categories:
1. Cash Dividend.
2. Stock Dividend or Bonus Dividend.
3. Bond Dividend.
4. Property Dividend.
5. Composite Dividend.
6. Interim Dividend.
7. Special or Extra Dividend.
8. Optional Dividend.
Meaning of Dividend Policy: A policy which determines the amount of earnings to be distributed to the shareholders and the amount to be retained in the company as retained earnings, is called dividend policy. In short, dividend policy determines the division of earnings between payment to shareholders and retained earnings.
Types of Dividend Policy
Dividend policy varies according to characteristics, level of earnings, stability and attitude of management of the firm. Following are the types of dividend policies:
a) Conservative Dividend Policy.
b) Liberal Dividend Policy.
c) Stable Dividend Policy.
Stable Dividend Policy: Stability of dividends means regularity in payment of dividends. It refers to the consistency in stream of dividends. In short, we can say that a stable dividend policy is a long term policy which is not affected by the variations in the earnings during different periods. The stability of dividends can take any one of the three forms:
a) Constant D/P ratio.
b) Constant dividends per share.
c) Constant dividend per share plus extra dividends.
a) Constant D/P Ratio: The ratio of dividends to earnings is known as payout ratio. With this policy the amount of dividends varies directly with the earnings.
b) Constant Dividend Per share: According to this form, a company follows as policy of paying a constant dividend irrespective of its level of earnings.
c) Stable Dividend plus Extra Dividends: Under this policy a firm usually pays a small fixed dividend to the shareholders and in years of prosperity additional dividend is paid over and above the fixed dividend.
Merits of Stable Dividend Policy: Following are some of the advantages of a stable dividend policy:
a) This policy contributes to stablise market value of company’s equity shares at a high level.
b) This policy helps the company is mobilizing additional funds in the form of additional equity shares.
c) Regular earnings in the form of dividend satisfy investors.
d) This policy encourages shareholders to hold company’s share for longer time and simultaneously other investors are also attracted for the purchase of shares.
e) This policy is helpful for expansion and growth prospects of a company.
f) This policy encourages the institutional investors because they like to invest in those companies which make uninterrupted payment of dividends.
Demerits of Stable Dividend Policy: Following are some of the disadvantages of a stable dividend policy:
a) Sometime despite of large earnings, management decides not to declare dividends.
b) In this policy, instead of paying dividend in cash, bonus share are issued to the shareholders.
c) This policy is used to capitalise reinvested earnings of the firm.