Is There A Best Approach When Setting Dividends Finance Essay

Dividend pertains on the portion of the net incomes of the house that are to be distributed towards the stockholders in the house ( Periasamy 2009 ) .Thus, dividend policy is considered as one of the funding determinations of house. Preferably, a house must hold either a policy towards its distribution processes or a policy towards the keeping processes. With this, it can assist the possible investors to hold thoughts sing the different innuendos of puting in that peculiar house ( Ogilvie 1999 ) . It is of import to see that dividend policy is critical to the house ; nevertheless, its procedure is complex. It is unpredictable because those stockholders who liked what they have received from the yesteryear can non be certain to like the same one the following clip. When the stockholders did non received what they want and need, they normally express their discontentedness through selling their stock. Therefore, proper planning of dividend policy is critical in order to avoid any disagreeable cases for the participants in the market, at the same clip, defend the market ( Gallagher & A ; Andrew 2007 ) .

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However, there are different factors which affect the procedure of puting dividend policy. Different surveies of dividend policy and the factors impacting it are considered as appealing but complex affair ( Nobes 1992 ) . In malice of the long clip of survey, researches and literatures do non entirely comprehend the factors that affect the dividend policy, and how these factors connects or relates with each other ( Bhattacharyya 2007 ) . As a consequence, different attacks are being used in order to put the dividend policy.

This paper will undertake issues that are related with the different factors which affect the procedure of puting the dividend policies, at the same clip, embark upon the different attacks used in order to put dividends and happen out if there is a best attack in puting dividends.

What is Dividend Policy?

Weston & A ; Brighan defined dividend policy as the one which settles on the division of wage to shareholders and retained grosss ( cited from Palanivelu 2007, p. 414 ) . Therefore, the dividend policy of a house pertains on its options make sing paying the shareholders a hard currency dividend, the sum of the hard currency dividend and how frequently it should be disseminated. In much broader sense, it help to concentrate on the determinations if the house will circulate hard currency towards the investors through portion redemptions or by peculiarly designated dividends, or by regular dividends and if the house will trust towards its portion or on the distribution of hard currency ( Megginson & A ; Smart 2008 ) .

Factors Affecting Dividend Policy

In make up one’s minding about the dividend policy, it includes all parts of payout including the rate of dividend, stableness, method and clip of the payments, etc ( Banjerjee 2005 ) . With this, it is critical to concentrate on the different factors or facets which affect the funding determination of the house. It is of import to concentrate on the factors which affect the well-being of the shareholders and the factors impacting the well-being of the proprietors. Therefore, it is critical to concentrate on the different external and internal factors that must be considered in order to program and implement appropriate dividend policy.

External Factors

General status of the economic system – the general status of the economic system straight and significantly influences the direction determinations of a house in administering its net incomes as dividend ( Palanivelu 2007 ) . The direction may take to maintain clasp of the full or portion of the net incomes with a position to the constitution of militias in the times of:

unstable status of economic system and concern ;

depression ( keeping back the payment of dividends in order to keep the liquidness place of the company ) ;

prosperity ( unfastened chances for big investing ) ; and

rising prices ( in order to reconstruct some raddled parts ) ( Bose 2006 ) .

Inflation can impact the dividend policy of the house – with the lifting monetary values, the financess that is being generated by offering depreciation concentrating on the historical cost of the assets fall short of their replacing costs when the replacing becomes due ( Banjerjee 2005 ) .

The province of the capital market – the grade to which the house has the entree towards the capital market besides influences the dividend policy ( Bose 2006 ) . If the state ‘s capital market place is good for the house, so the house may raise financess from different resources without holding jobs, hence, the direction can besides declare high rate of dividend in order to pull the investors. However, it is of import to see that in the stock markets, the stockholders are non that interested in puting in order for the house to follow a conservative dividend policy – care of low rate of dividend ( Palanivelu 2007 ) .

Legal limitations and authorities policies – there are some policies and ordinances of the authorities that affect the capacity of the house in net income earning. For case, there are times that the authorities confines and controls the distribution of dividend outside a given per centum in a given industry ( Palanivelu 2007 ) . One of the great illustrations is the Companies Act 1956 which contains different limitations that are related to the declarations and payments of dividends ( Bose 2006 ) .

Contractual factors – hard currency dividends may non be paid out if it infringes or disobeys the restraining demands as spelled out in the different contracts and understandings including loan, bond indentation, preferable stock or rental contract ( Carey & A ; Essayyad 1990 ) .

Tax policy and revenue enhancement position – the revenue enhancement policy implemented by the authorities besides act upon the dividend policy – high revenue enhancement consequences to less net incomes of the company, therefore the rate of the dividend will be lowered down ( Palanivelu 2007 ) . The house ‘s shareholders ‘ revenue enhancement position is critical facet to be considered when holding high fringy revenue enhancement rates because it is preferred to hold low dividend payout ratio ( Carey & A ; Essayyad 1990 ) .

Preferences and demands of the shareholders – the penchants and demands of the shareholders are other major external factors which affect the dividend policy. This is because of the fact that their demands and demands are critical for the direction in order to cognize how to pull them, therefore enabling extra fiscal support towards the house. There are three of import factors which influence the penchants and demands of the shareholders, which include: current income demands, alternate utilizations for financess and revenue enhancement considerations ( Banjerjee 2005 ) .

Other factor to be considered is the policy of rivals.

Internal Factors

Age of the company – a freshly founded company may necessitate high sum of its net incomes for the development intent, therefore a stiff dividend policy will be formulated. For older company, consistent policy for dividend is applicable ( Palanivelu 2007 ) .

Stability of net incomes – a company with stable net incomes is more expected to pay higher per centum of net incomes than those with the fluctuating net incomes ( Ogilvie 1999 ) . This is connected with the concern rhythm, where in concern experience altering profitableness during the concern rhythm, therefore it is of import to smooth the sum paid as dividend every twelvemonth ( Banjerjee 2005 ) . Therefore, during the roar period, it is of import for houses to travel in, in order to derive and keep net income, with the purpose that, during the clip of recession and crisis, the same procedure can be done and implemented in order to smooth the dividend ( Banjerjee 2005 )

Liquidity, refund of debt, working capital and demands for financess – it is critical to take note that, the payment of the dividend lessens the sum of the on the job capital. Therefore, it is of import to see the handiness of hard currency and the impact of the dividend payment towards the on the job capital and the liquidness of the house ( Banjerjee 2005 ) . Even those financially stabled and established companies may sometimes hold the trouble in paying dividends if their resources are tied up in other signifiers of buttockss, peculiarly if bank overdraft installations are unavailable ( Ogilvie 1999 ) .

Need for and rates of enlargement – as portion of strategic development of company, enlargement are critical move in order to better the place of the company in the market. Therefore, there is a great demand for sufficient financess from different resources, but the most of import beginning is the maintained gaining – with this, in order to keep high retain net incomes ; the dividend will be paid less ( Banjerjee 2005 ) .

Future financing – a house that anticipate secure outside financess to finance or put a portion of its future growing must concentrate on giving proper consideration to it in all of the fiscal policies in the hereafter. This is because of the fact that the old dividend policy of a house can impact the market because of the new issues of equity portions and debt capital ( Banjerjee 2005 ) .

Informational Content or Signing Effect – this pertains on the information content of the dividends ( Ogilvie 1999, p. 68 ) .A stable dividend payout is considered as a mark or intimation to the shareholders that the company is successful, therefore worthy to put in ( Carey & A ; Essayyad 1990 ) .

All of these external and internal factors influence the determination doing procedure of the direction sing the dividend policy. These are of import factors to see in order to guarantee the success of the company, by guaranting that the dividend policy is appropriate for the current position and state of affairs in the concern and fiscal environment, internal status of the house and the demands of the shareholders.

Approachs in Puting Dividends

Companies are non compelled to pay their dividends or to keep the stableness and regularity of dividends. But, the dividend normally reflects the fiscal image of the company, including its portion monetary value. As a consequence, companies are utilizing different methods and attacks in puting a dividend policy. Companies are protecting themselves through the choice of the dividend payment attack that will enable them to cover with the outlooks and demands of the stockholders. There are three types of attacks used in puting the dividends: residuary, stableness and loanblend.

Residual Approach

Using the residuary attack, the house financess any new undertakings and investings from the equity that it generates and produces in internal mode and pays the dividends merely after geting the capital demands of these undertakings or investings. Therefore, the investors or shareholders merely receive a portion of the net incomes of the house if there are leftover in the money at the terminal of the one-fourth. With this, it can assist the house to maintain and keep their shareholders because they are less expected and disposed to sell their portions if they do n’t have any dividend payment for a given one-fourth because they know that they will still have dividend in the following one-fourth ( Carrel 2009 ) .

The companies that are implementing this attack normally attempt in keeping the balance between their debt and equity before prosecuting into any distribution procedure of the dividend which show that these houses decide on the dividends if and merely if there is sufficient money or fund left over after all of the disbursals that are related to operation and enlargement have been met.

Stability Approach

A stableness attack sets the dividend at a holes and stable figure, normally a per centum or fraction of the net incomes gained in one-fourth and one-year mode or known as the payout ratio. This enables the shareholders to hold a greater degree of assurance and religion that they will be able to have a dividend and how much it is possible to be. Those houses that are implementing this attack have a leaning to do conventional undertakings in order to forestall let downing the shareholders ( Carrel 2009 ) .

The rise and autumn of the dividends due to the residuary policy vitally oppose with the soundness of the dividend stableness policy. This is because, with the stableness policy, houses may choose a recurring policy whereby quarterly dividends are made at a fraction of the net incomes every twelvemonth.

Hybrid Approach

The intercrossed attack is considered as a combination of the residuary and stableness attacks. Companies that use and implement this attack have a inclination to put a low and fixed dividend which they believe as easy to keep, and so apportion and give out extra dividends when they can pull off to pay for it ( Carrel 2009 ) .

With this attack, companies are likely to see the debt and equity ratio as a long-run instead than a short-run end. Presently, this attack is normally used by the companies that are paying dividends. Because these houses will usually see and meet fluctuations in its concern rhythms, they normally have one set dividend, which is set as relatively little portion of the one-year income and can be maintained easy. Above of this set dividend, companies using this attack will supply another extra dividend wage merely when the income exceeds the general degrees.

Is there a Best Approach in Puting Dividends?

After analysing dividend policy, it shows that there are different factors which influence and affects how houses or companies set and implement their dividend policy. In connexion, there are three types of attacks which can be used in order to put the dividend policy. These three attacks help houses and companies to put the different procedures and methods to be used which trades with the clip, mode and sum of dividend to be distributed towards the shareholders. As have tackled in the first portion of the paper, different surveies from the past sing the dividend policy and the factors which impacting it shows that it is a really complex and complicated procedure, therefore, until now, literatures do non wholly understand the connexions and dealingss of these factors with each other, as an result, different attacks are being used in order to put dividend policy.

Based on these, it can be said that there is no best attack which can be used in puting dividends, significance, all of the three attacks are considered as best on their ain sort. There is no such thing as one size fits all in puting dividend policy. This is because of the fact that different houses face different environment, different challenges, different chances and different menaces to cover with. Therefore, the procedure of taking the appropriate or best attack will be based on the state of affairs, status or the position of the house, peculiarly based on the different external and internal factors which affect the procedure of puting dividend policy. It will all based on the current and future demands of the company and the demands and demands of the shareholders, at the same clip, focuses on the different policies, ordinances and Torahs to be announced and implemented by the authorities and other governments.

Based on these current and future demands, demands and demands, the house can choose which among the three attack suit or travel with their fiscal ends, aims and fiscal capablenesss.


Dividend policy is an of import fiscal determination for houses and companies. This is because of the fact that dividend will decrease or cut down the overall net income of the company – therefore it is the sum of money to be distributed to the shareholders. At the same clip, it besides has a critical impact towards the fiscal image of the company towards the current and possible investors and the full market. With this, it is of import to guarantee that the dividend policy will be suited to the overall demands and state of affairss of the house.

Different external and internal factors must be considered in make up one’s minding about the dividend policy to be implemented which include those that are related with the current economic and political state of affairss and events in the full concern environment, while the internal factors pertains on the fiscal and non-financial jobs, hazards and chances encountered by the houses in its day-to-day operations and public presentations. These factors must be considered in taking the right or appropriate attack in puting dividend policy.


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