What role is played by a financial manager in matter of dividend policy. Discuss the
alternatives that he might consider and the factors which he should take into consideration
before finalizing his views on dividend policy?
Answer 5
The profits of a company when made available for the distribution among its shareholders are called dividend. The dividend may be as a fixed annual percentage of paid up capital as in the case of preference shares or it may vary according to the prosperity of the company as in the case of ordinary shares. The decision for distributing or paying a dividend is taken in the meeting of Board of Directors and in confirmed generally by the annual general meeting of the shareholders. The dividend can be declared only out of divisible profits, remained after setting of all the expenses, transferring the reasonable amount of profit to reserve fund and providing for depreciation and taxation for the year. It means if in any year, there are not profits; no dividend shall be distributed that year. The shareholders cannot insist upon the company to declare the dividend. It is solely the discretion of the directors. Aunt hinted that the dividend was an income of the owners of the corporation which they received in the capacity of the owner. Distribution of dividend involves reduction of current assets (cash) but not always. Stock dividend or bonus shares are an exception to it.
Factors Affecting Dividend Policy
The economic soundness of a company is generally judged by the amount of dividend declared and paid by a company. It affects its goodwill among the shareholders and the prospective share holders. Dividend is apart of profits distributed among the shareholders. The basic question before the Board of directors is how much profits should be divided among shareholders as dividend and how much to be retained in the business as reserves to meet the future contingencies and for expansion of business. Both-future expansion and distribution of dividend are desirable but in conflict. Hence, allocation of earnings between dividends and retained earnings is an essential part of management functions; it requires a sound dividend policy to be followed by the corporation According to Weston and Brigham “Dividend policy determines the division of earnings between payments to shareholders and retained earnings”. In this connection, the dividend declared during previous years may be taken as a base and the same rate is followed in the coming years. Generally, Board of Directors aim at maintaining the dividend rate which we may call a “Stable Dividend Policy”. For its purpose a 'dividend equalization fund' is created out of profits to equalize the profits of the coming years.
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