A dividend policy is a set of goals and objectives that the corporation’s board of directors sets for the corporation. These may include raising shareholder value, earnings per share growth, capital growth, or financial leverage. The main objectives can vary depending on the size and characteristics of a business. Managers generally determine dividend policies to encourage shareholders to keep their shares over time. An investment firm’s dividend policy is a series of determinations and policies that determine how much dividends the firm pays to shareholders, who can receive in cash or as stock. The objectives of dividend policy are to provide the following:
1. Wealth Maximization
Corporate managers hope to have the best market mix of stock price, dividend, and earnings per share. Providing this information to shareholders allows them to make informed decisions about their investment options. The aim is to maximize shareholder value. A corporation can grow its total wealth by increasing its cash value by issuing dividends. This can be done by paying dividends and, at the same time, maintaining constant or increasing cash flow from operations.
2. Income Maximization
A company can pay out its current earnings as dividends to shareholders. This can be done by paying regular dividends throughout the year. It is a good way for investors to plan how much income they need during the year and how much they will receive from a specific amount of investment.
3. Capital Appreciation
By paying a dividend, investors have an opportunity to build wealth because the value of their shares will appreciate if the company does well. This gives them a basic idea about what to expect for investment returns. It is also an excellent way to attract other investors and build credibility in a corporation as it grows in size and reputation. Motives for dividend payments may differ in industries where stock price volatility is a concern, such as in the utility industry, versus industries where volatility is less of a situation, like the service sector or the pharmaceutical industry.
4 . Stable Rate of Dividend
A corporation can choose to pay a stable dividend rate, which provides investors with a certain level of income over time. The dividend rate can be adjusted as the company goes through different growth phases. It is generally changed so that the company’s debt (bonds) remains the same so that both liabilities and assets are kept in balance. A corporation may set up a regular monthly or quarterly dividend that does not change, regardless of current market conditions. This can reassure investors and help them have confidence in the corporation.
5. Tax Considerations
Dividend distributions count as income from a company to an investor, which means that the investor will have to pay taxes as an individual on any dividends received from the corporate investment. This can be a concern for investors depending on their tax situation, which should be considered when choosing an investment. Generally, corporate managers try to structure dividends to minimize the burden on the investor.
6. Investor Relations
Dividends are generally declared by corporations annually and are usually announced as part of annual reports. This allows shareholders to keep track of the dividend payments and provide information about the company’s financial performance.
7. Degree of Control
The main objective of the board of directors is to create a decision-making body that is as independent and informative as possible. The relative independence of the board of directors must be emphasized to provide shareholders with confidence in their decisions and to make good decisions on behalf of shareholders. The objective is, therefore, to give investors a sense of control over their investment by providing information about how their money will be used and at what pace it will be used.
8. Retention Strategy
Dividend payments are usually declared annually, and a payment plan is enunciated. This means that shareholders must give the corporation up to 12 months’ notice before they can sell their investment. They can control the pace of dividend payments by selling their shares, but this may be detrimental to overall shareholder value as dividends may be paid out at a slower rate than planned. Many corporations have a particular retention strategy for their investment portfolio. By distributing tips to investors, the corporation intends to have some control over its stock price. This can be done in different ways, including gifts, approved share buy-backs, or increased shareholder equity.
The two main methods of dividend policy implementation are conservative and progressive. In a traditional approach, the business will maintain an initial steady dividend amount, hence the term ‘conservative.’ This is done to ensure that the corporation is not undervalued in the market because its dividend yield would be lower than its competitors.