Dividend policy means policies related to the distribution of the dividend to the shareholders. The share of a company’s after-tax earnings paid to its owners on the basis of the number of shares owned by them that is after payment of the taxes the surplus amount is distributed among the shareholders as per their shareholding in the company.
The size and timing of the dividend shall be determined by the Board of Directors, who shall also specify if the dividend is paid on the basis of current earnings or historical earnings held as a reserve. Dividends offer an opportunity to own shares in profitable businesses even though they do not experience much growth. The firms offering dividends are most likely companies that have moved past the development period and no longer prosper enough from reinvesting their earnings, so that they typically prefer to pay dividends to their shareholders.
TYPE OF DIVIDEND POLICY:
1. Regular dividend policy: holders receive dividends at the normal pace with this form of dividend policy. In this case, customers are usually elderly individuals or a poorer segment of the company who wish to provide monthly profits. This method of dividend payout will only be continued if the corporation has daily earnings.
Merits of Regular dividend policy:
– helps to build trust in shareholders.
-It maintains the market value of the shares.
-It helps to marinate the goodwill of the brand.
-It helps to provide shareholders with daily dividends.
2.Stable dividend policy: here transfer of a certain amount of money is made on a daily basis to shareholders. It has three types:
3.Constant dividend per share: in this case, a contingency fund is set up to pay a fixed amount of dividend in the year in which the company’s earnings are not sufficient. It is ideal for companies with healthy earnings.
4.Constant pay-out ratio: means payment of a certain proportion of earnings as a dividend per year.
Stable rupee dividend + extra dividend: means payment of a low dividend per share on an ongoing basis + extra dividend in the year in which the firm makes a high profit.
5. Irregular dividend: as the name implies, the company does not pay the owners a regular dividend. The corporation uses this practice for the following reasons:
-Due to the company’s unpredictable earnings.
-Because of the scarcity of liquid capital.
-Sometime the management was fearful of offering a monthly dividend.
-Not so much a profitable enterprise.
6.No dividend: this form of dividend strategy can be used by the company on the basis of the need of funds for the development of the company or the need for working capital.
- Companies report or pay dividends for each financial year on the basis of earnings or cumulative profit (free reserves only) from the existing year on the basis of depreciation with the provision of section 205(2) of the act. The company as a mandate has to transfer to the reserves such a percentage of surplus profit not exceeding 10% in addition to depreciation under section 205(2A).
- Before a dividend is declared, a corporation can move a portion of the benefit to the reserves of the company. The organization is free to settle on the percentage of such move to the reserve. In addition, the dividend can also be declared out of the money allocated by the central government or the state government for the payment of the dividend on the basis of the guarantee granted by that government.
- The Board of Directors may, in the course of the financial year, announce an interim dividend on the surplus in the profit and loss account. In the event of losses incurred by a corporation as per the financial statements of the last year, the interim dividend shall not be more than the total dividend declared by the company over the last three financial years.
- The balance of the dividend and the provisional dividend shall be deposited in a different bank account within five days from the date of the announcement of the dividend.
- Where a dividend has been proclaimed by a corporation but has not been paid or claimed within thirty days from the date of the declaration to every shareholder entitled to pay the dividend, the company shall, within seven days from the date of expiry of the said period, pay the dividend within thirty days. Then the entire balance of the dividend that is owed or unclaimed to a special account to be opened by the corporation under that name to every scheduled bank to be named the Unpaid Dividend Account.
The dividend is to be paid only to registered shareholders.
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