Saturday, 12 March 2022

What does the term dividend policy mean?

Dividend policy is the process of determining how much stockholders will receive in the form of dividends for each period. Dividend policy is essential because it can affect the value of stockholders and companies. Dividend policy is used to decide how much of a company’s profits will be paid out as a dividend. The policy also determines how much premium the company will pay each year and who will get a bigger part of the dividend. The company’s dividend policy may be used to achieve three different goals: increase the amount of cash available to the company, reduce its tax liability, and distribute surplus cash to shareholders. Get Expert Dividend Policy Assistance only from My Academic Helps. 

In simple terms, the dividend is the part of the profit the company gives to its shareholders. It is a payment made by a company to its shareholders to reward them for their investments and thus encourage them to continue investing. The word dividend derives from the expression dividend of stocks in this context.

Approaches to dividends

Dividends are the most likely way investors will be paid for holding their stocks. They will receive dividends when a company is making a profit. Investors will not be paid until the company is profitable. The residual and stability approaches are the most likely. An example of residual strength is the long-term stability of the Japanese economy, as illustrated by its continued rise with the rest of the world. A robust economy with high savings and investment rates will result in a positive (or higher than average) GDP growth rate. If the economy is not robust, the economic growth rate will be negative.

Policy of dividend

There are two types of dividends; they are called ‘current’ or ‘special’. A current dividend is declared and paid out within the same financial year. A dividend paid out in the previous financial year was a ‘special’. As of June 2008, the dividend for all companies is currently 3.5%. The most common method of dividend payout is the cumulative dividend policy, where the payout is decided based on the cumulative share price value. For instance, if the share price is $50, the cumulative dividend payment is $0.50. The following amount will be $0.75, and the subsequent payments will be $0.85. These kinds of policies are usually a low-risk method to keep investors happy. With a cumulative dividend policy, the payment of dividends is fixed at the end of the year. In other words, the company will pay the same amount of dividends every year. However, it has two advantages. First of all, the company will not have to pay any taxes on dividend income because it is taxed at the corporate tax rate rather than the individual tax rate.

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