Dividend Policy (Modul MKL 2010-2011)

DIVIDEND POLICY

BRIEF CONCEPT

Definition:

Dividend is the distribution of value to shareholders.

Dividend Policy:

What happens to the value of the firm as dividend is increased, holding everything else (capital budgets, borrowing) constant. Thus, it is a trade-off between retained earnings on one hand, and distributing cash or securities on the other.

Relevant Dates:

Record date : all person whose names are recorded as the stockholders on the date of record set by the directors receive a declared dividend at the specific future time. When stockholders buy stock after ex dividend rate,(2 business days to record date) do not receive the current dividend,because needs time to make bookkepping entries.

Payment date is the actual date on which the firm mails the dividend payment to the holders of record.

Types of Dividend Policy

The firm’s dividend policy must be formulated with two basic objectives in mind:

ü  Providing for sufficient financing

ü  Maximizing the wealth of firm’s owner.

There are three commonly used dividend policies :

1 CONSTANT-PAYOUT-RATIO DIVIDEN POLICY

Indicates the percentage of each dollar earned thet the firm distributes to the owners in the form of cash. Although its not recommended because will cause owners uncertain about the returns they can expect.

2. REGULAR DIVIDEN POLICY

Is based on the payment of a fixed-dollar dividend in each period.This policy provides the owners with generally positive information,thereby minimizing their uncertainty.

3. LOW-REGULAR-and-EXTRA DIVIDEN POLICY

Paying a low regular dividend,supplemented by an additional dividend when earnings are higher than normal in given period.

 OTHER FORMS OF DIVIDEND

1. STOCK DIVIDEND

Is the payment,to existing owners, of a dividend in the form of stock. It will not cause change in stockholders equity,funds have merely been shifted among stockholders equity accounts. It will cause lower per-share market value of firms’s stock.

2. STOCK SPLIT

Is method used to lower the market price of firm’s stock by increasing the number of share belonging each shareholders.

3. STOCK REPURCHASE

Firms repurchasing of outstanding common stock in the market place.

FACTORS AFFECTING DIVIDEND POLICY :

                                                                                               

1.      Legal constraints

2.      Contractual constraints

3.      Internal Constraint

4.      Growth prospects

5.      Owner Considerations

6.      Market Considerations