Dividend Policy and their Types. The vision of a company regarding the part of the profit ( remaining after the retained earnings are kept aside) to be declared as a dividend. is referred to as its ” Dividend Policy”. The dividend policy of a company is developed and implemented through its ‘Board of Directors. It defines the pattern of dividend declarations to be followed in the long term.
Types/ Classification of Dividend Policy
A company may adopt one of the following types of ‘Dividend Policy’, depending upon the suitability:
1) Regular Dividend Policy :
A company having a steady stream of income may prefer this category of ‘Dividend Policy’. It means the payment of dividends on a regular basis, even if the rate of dividend is low. In other words, the focus is on the regularity of dividend payout rather than on its rate. It suits the investors, which are:
- Retired persons, and
- Persons belonging to the low-income groups.
2) Stable Dividend Policy :
This category of dividend policy ensures regular payment of a fixed percentage out of a company’s annual company to its shareholder.s. It has three sub-categories:
i) Constant Dividend per Share:
Under this sub-category, a ‘Reserve Fund’ is created to take care of the payment of fixed dividends to the shareholders even during a year when the company is inadequate to generate revenue. Companies having stable annual income find this policy suitable.
ii) Constant Payout Ratio:
In this sub-category, a fixed percentage of a company’s annual earnings is paid to the shareholders as a dividend.
iii) Stable Plus Extra Dividend:
A low rate of dividend per share is paid to the shareholders on a regular basis. However. in the year of higher profit plus extra dividend is paid.
3 ) Irregular Dividend Policy:
As the name itself suggests under this type of policy, a company does not pay dividends to its shareholders on a regular basis, because of certain reasons, some of which are as follows:
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- Annual revenue generation by a company may be unpredictable.
- A company may be facing a liquidity crisis.
- A company may be scared of giving regular payouts, due to certain reasons of the Company.
- The business carried out by a company may not be a success or profitable.
4) No Dividend Policy:
At times, a company may like to keep its entire net profit as ‘Retained Earnings’ to be utilized for its business growth or for meeting its working capital needs.
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