Question

How is it possible that dividends are so important, but, at the same time, dividend policy is irrelevant? Without taxes or any other imperfections, why doesn’t it matter how the firm distributes cash?

Answer 1

Is it possible that dividends are so important, but at the same time, dividend policy is irrelevant ?

Answer - No to some extent

Dividend distribution is important for a company if it achieves profits in a financial year to sustain growth in the market but on the other hand an efficient dividend policy should also be there to maintain a proper dividend payout ratio and retention ratio. Dividend payouts is the distribution of profits among the shareholders of the company either the rate of dividend is fixed in case of preference shares or not in case of equity shares. Dividend that is fixed cannot be changed or modified with respect to the dividend policy and hence the dividend policy is irrelevant for the distribution of fixed dividends. On the other hand, in case where the distribution of dividend is not fixed and vary upon the profitability of the company, the dividend policy is most relevant for the company to follow. An efficient dividend policy helps the company to maintain its future growth in terms of marketability and shall helps in maintaining goodwill of the company. Dividend policy also helps the company to design its retention ratio so as to keep some part of profits for the future business expansions and growth. Hence from the above discussion we can conclude that dividend policy is relevant with the distribution of dividend.

Without taxes or any other imperfections, why doesn’t it matter how the firm distributes cash?

Answer - The distribution of dividends is the subject matter of the bye-laws of a company and the policy may be designed in such a way so as it does not affect the growth and objective of a company. Taxes and other constraints does not affect the distribution of profits as dividend because all the constraints have already been considered while designing the dividend policy of the company, Since the dividend policy is very much relevant for the distribution of dividend it doesn't matter how the firm distributes cash without taxes or other imperfections.