It is a term which means that a particular thing is to be divided. It is a part of profit of the company which is being distributed among the shareholders. It is different from interest in the sense that, there are no contractual obligations of the organisation. It is being identified that the dividends are about two different things. It is being identified as payment being made out of profits and it comes after actual release of business assets.
If the organisation is being issuing bonus shares to the shareholders then, it does not amount to dividends as there is no release of assets of the organisation and there is no relation to the profits of the organisation. A trading company has inherent power for distribution of its net earnings or profits to shareholders in the course of dividends. The power to provide dividends is not being given by Memorandum and articles of association of the organisation (Henderson, 2011).The profit of the organisation could be distributed to its shareholders as dividends or it can also be retained in the company as retained earnings. There are certain kinds of dividends which are being taken into consideration by the organisation.
- Cash dividends: In the course of cash dividends, dividend is being paid in cash at the time of declaration by the organization.
- Stock dividend: In this category of dividends, dividend is being paid by the organization in the form of additional shares instead of providing cash to the parties
- Property dividend: This is an alternative to stock and cash dividend. In this area, the organization provides share in subsidiary company or physical assets to the investors instead of dividends.
- Scrip Dividend: Here, provisional certificates are being given by the organization against cash dividends being offered.
- Liquidating dividend: This is a kind of dividend which is being paid at the time of liquidation of the organization.
This is a kind of dividend which is being declared by board of directors of the organisation between two annual general meetings. This power is being available to the board of directors of the organisation. The board of directors can pay dividend if they consider that interim dividend is being justified on the basis of profits being generated by the organisation. It is payment on account of full dividend being generated by the organisation. If an organisation incurs loss in a year then interim dividend is going to be considered as payment of full dividend by the organisation. The dividend is going to be paid by the organisation from its capital.
The organisation should ensure that it is being preparing interim financial statements at the pint when, it is being declaring interim dividend. It is being done to identify whether profits of the accounting period are being sufficient enough for the purpose of payment of dividends. The organisation has to compulsorily provide for depreciation of the whole year at the point of declaration of dividend.
In case of final dividend, it is being identified that it can be paid out of free reserves. In the case of interim dividend, transfer from free reserves cannot be made. The board should ensure that, it takes into account a percentage of amounts which is to be transferred before interim dividend could be declared by the organisation. The organisation has to ensure that, it works out on these things at the pint wherein, it is being doing board meetings.
Determinants of Dividends
There are certain determinants which identify whether the organization can move forward with the declaration of dividend or not. The determinants being identified by the organization are as follows. The dividends affect the fact that, preference dividends are being paid out and remaining dividend is being divided in the shareholders.
- Dividend stability
- Dividend payout ratio
- Capital market consideration
- Consideration of owners
- Legal contractual and internal constraints and restrictions
Other determinants include the following:
- Control objectives
- Magnitude and trend of earnings
- Desire and type of shareholders
- Policy of taxation
- Inventory nature
- Government economic policy
- Age of the company
- Future financial requirement
- In the course of financial management of the organization, there is huge requirement of dividend policy. This dividend policy is one of the crucial areas in the course of decision making by finance manager. This is being concerned with the financial policies being identified and finding out whether payment of cash dividend is to be made by the organization or not. Dividend decision makes influence on availability and cost of capital, dividend decision and dividend policy is a crucial aspect of decision making being carried out by the organization. The financial manager has to decide upon the distribution of profits as dividends in a proper and appropriate way.
Decisions regarding Dividend Distribution
a. Should the profits be ploughed back for financing the investment decisions or it is to be paid to shareholders
b. What should be the form in which dividends are to be paid to the shareholders
c. When are dividends required to be paid
d. Whether dividend is to be paid to equity shareholders also?
Significance of Dividend Decision
- High influence on value of the organization
- Helps in balancing between distribution to shareholders and dividends and growth of the company
- Dividends would influence the market price of shares
- Retained earnings to be kept by the organization
- Company has to ensure that it balances between maximization of wealth and long term financing decisions.
If there is increase in value of share of the organisation then, market price of the share is definitely going to increase and with the decrease in level of dividends, market price of the share is going to decline. The shareholder expectations are to be fulfilled by the organisation with high dividends being identified. A firm should ensure that it is being paying dividends to shareholders to ensure that their expectations are being met. This is also going to help in ensuring that the price of share of the organisation keeps on increasing. There are two models of dividend policy which are to be taken into consideration.
- Walter’s Model: The dividend policy of the organisation has to be taken into consideration in a way that value of the firm is being identified and this model identifies the relevance of dividend policy for ensuring that, valuation of the organisation is being carried out in a proper and appropriate way.
Assumptions of Walter’s
- The investment proposals which are to be financed are to be financed only by way of retained earnings. There is no other source of finance available to the organization in the course of its working.
- The business risk complexion of the firm is to remain the same after fresh investment and decisions are being taken. The rate of return on investment and the cost being incurred by the organization remains constant in the area of doing the tasks which are being assigned at a particular pint.
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