Question

Long-answer: Please explain why some companies in the capital market tend to adopt a high dividend policy, while others prefer a low dividend policy based on dividend policy theories. And indicate elements companies should consider when determining dividend policy

Answer 1

Some companies in the capital market often tend to adopt to high dividend policy because they are generating high level of profit and they want to pay to their shareholders, a high share of profit because profits are ultimately belonging to the shareholders.They can also adopt to pay a higher dividends because they do not have better investment opportunities in the market and they want to return the money back to the shareholders. Various companies who are in their Maturity stage of company life cycle often tend to pay higher dividend to shareholders.

Some other companies who tend to lower Dividend policy because they have better investment projects and they want to earn through making the investment into other projects then returning the money back to the shareholder. These companies want to grow and they are growth companies. They also want to have adequate liquidity in their hands and hence they do not return the money back to the shareholders as they want to invest their profits back into the business.

Various elements, A company should consider when determining Dividend policy are-

A. Liquidity in the books of accounts of company must be considered before making a decision regarding Dividend policy.

B. Stability of earnings must be considered in order to achieve higher dividend.

C.Financial policy of company should also be considered when making dividend related decisions.

D. Rate of profits should be higher in order to have a higher dividend payout ratio.

E. All such legal requirements and legal compliances must be considered in order to issue dividend.

F. Policy of control and ability of borrowing must be checked into, before deciding upon dividend payments.