Dividend policy

The organizations earn a good amount of profits and they do not distribute whole part of profits to all. The amount of profit is turned over in the form of retained earnings. The profit is distributed among all shareholders and the part which is distributed is known as dividend. Dividend policy has become a major area of interest in financial perspective. Dividends are normally explained as the division or the proper distribution of past or present earnings in terms of real assets among all the shareholders of the organization in sharing of their ownership.

Dividend policy signifies the payout policy that managers practise for making a decision of the cash distribution patterns to the shareholders (Frankfurter et.al, 2003). The primary goal of the organizational management is the wealth maximization of shareholders that transforms in increasing the organization’s value as measured with the help of stock prices of the company. This goal can be attained by providing fair amount of profits or earnings to their shareholders.

The dividend policy has been placed as most prominent problem of finance. These points are of greater concern that how much part of the cash should be given back to the shareholder of the firm?  Is it needed for the organizations to pay the dividend to their shareholders by dividends or by making repurchase of their shares? It becomes the major role of the organizations to take such decisions after a particular time period.

Dividend policy is of 2 types such as residual and managed. In case of residual dividend policy, the dividend amount is the cash which is left just after making investments by using the rules of NPV.  In case of optimal dividend policy, it increases or maximizes the stock price of the company that gives rise to the wealth maximization of shareholders. For an example, Modigliani &Miller firms states that the optimal dividend policy of the organization does not impact largely the wealth of the shareholders. Their dividend policies are similar. The amount of their dividends is safe as compared to the capital gains.

References
Frankfurter, M, George and Wood Bob, G (2003), “Dividend Policy Theory and Practice”, Academic Press.

Ronald C. Lease (2000), Dividend policy: its impact on firm value, Harvard Business School Press, 111-114