What are the Factors affecting dividend decisions? What is a dividend?
In this post, we will learn about dividends and the factors affecting dividend decisions.
The dividend is that portion of the profit that is distributed to the shareholders. The decision involved here is how much of the profit earned by the company after paying tax is to be distributed to the shareholders and how much of it should be retained in the business. Generally new or any upcoming company keep aside more of their retained earnings and distribute less dividend whereas established company prefer to give more dividend and keep aside less profit.
Factors affecting dividend decisions
The finance manager analysis the following factors before dividing the net earning between dividend and retained earnings:
Dividends are paid out of current and past earning. Therefore, earnings are a major determinant of the decision about the dividend.
2. Stability of Earnings
Other things remaining the same, a company having stable earning is in a better position to declare higher dividends and a company having unstable earnings is likely to pay smaller dividends.
3. Stability of dividends
Companies generally follow a policy of stabilizing dividends per share. The increase in dividends is generally made when there is the confidence that their earning potential has gone up and not just the earnings of the current year.
4. Growth opportunities
Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment.
If the company has no investment or growth plans then it would be better to distribute more in the form of a dividend. Generally matured companies declare more dividends whereas growing companies keep aside more retained earnings.
This was all about the factors affecting dividend decisions.
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