DIVIDEND POLICIES AND DECISIONS

DIVIDEND POLICIES AND DECISIONS

Dividend policy determines the division of earnings between payment to stock holders and re-investment in the firm.  It therefore looks at the following aspects:

i).   How much to pay – this encompassed in the four major alternative dividend policies.

·         Constant Amount Of Dividend Per Share

·         Constant Payout Ratio

·         Fixed Dividend Plus Extra

·         Residual Dividend Policy

ii)         When to pay – paying interim or final dividends

iii)        Why dividends are paid – this is explained by the various theories which has to determine the relevance of dividend payment i.e.:

·         Residual dividend theory

·         Dividend irrelevance theory (MM)

·         Signalling theory

·         Bird in hand theory

·         Clientele theory

·         Agency theory

iv)        How to pay: cash or stock dividends.

Importance of Dividend Decisions

Dividends decisions are integral part of a firm’s strategic financing decision.  It is therefore a plan of action adopted by management e.g payment of high dividends means less retained earnings and the firm may have to go to the market to borrow for investment purposes.  This will increase its gearing level.