Dividend Policy- Determinants

Dividend is that part of profit that is distributed among the shareholders of the company .
The payment of dividend includes legal and financial formalities. It is difficult to determine general dividend policy which can be followed by a firm at different situations.


Magnitude of earnings
As dividend can be paid out of present and past earnings, trend and magnitude of earning becomes the starting point of consideration. Moreover retained earnings of the past generally go in investment and hence the amount of profit determines the dividend policy.



Future financial requirement
Dividend policy is also affected by firm’s future capital needs. Funds are required for diversification, expansion and tapping new opportunities. Firm looking out for such options may retain profit and may neglect announcing dividends for the current year.

Income tax
Dividend policy is tremendously affected by the income tax regulations. Income tax may affect the total profit of the company leaving behind a very small amount to be declared as dividend. Moreover if dividend income of the shareholders is heavily taxed the company may not announce dividends on a regular basis in order to safeguard the interests of its share holders.
Age of the company
A newly established business may not declare dividends as its major objective would be to increase the retained earnings that can be used at future period of time.Declaring dividend will result in lack of liquid resources which can limit the establishment in taking advantages of upcoming opportunities. Where as an old establishment can follow a liberal dividend policy because of its piled up profits from the past.

Liquid resources
Dividend can be paid out only when the firm has full control of its liquid resources like cash, marketable securities etc. Lack or requirement of liquid resources in near future goes up in deciding the type of dividend that has to be declared.

Institutional investors
The firm has also to keep in consideration the demands of its institutional investors which helps it time and again. Institutional investors like bank, financial houses etc generally favors a regular payment of cash dividends. Since these investors play a pivotal role in providing financial aid to the company, the company has to mould its dividend policy accordingly.