many considerations may affect a firm's decision about its dividends, some of them are unique to that company, and some of the more general considerations are given subsequently.
1. desire of shareholders
shareholder may be interested either in dividend incomes or capital gains. wealthy shareholders in a high income tax bracket may be interested in capital gains as against current dividends. a retired and old person, whose sources of income is dividend, would like to get regular dividend in a closed held company, management usually knows the desire if shareholders. so, they can easily adopt a dividend policy that satisfies all shareholders. but in a widely held company, number of shareholders is very large and they have diverse desire regarding dividend and capital gains, some shareholder want cash dividends, while other prefers bonus share.
2. legal rules
certain legal rules may limit the amount of dividends a firm may pay. these legal constants fall in to two categories. first, statutory restrictions may prevent a company from paying dividends. while specific limitations very by state, generally a corporation may not pay a dividend (1) if the firm's liabilities exceed its assets , (2) if the amount of the dividend excesses the accumulated profits, and (3) if the dividend is being paid from capital invested in the firm. the second types of legal restrictions is unique to each firm and result from restrictions in debt and preferred stock contracts.
3. liquidity position
the cash or liquidity position of the firm influences its ability to pay dividends. a firm may have sufficient retained earnings. buy it they are invested in fixed assets, cash may not be available to make dividend payment. thus, the company must have adequate cash available as well as retained earning to pay dividends.
4. need to repay debt
the need to repay debt also influence the availability of cash flow to pay dividend.
5. restrictions in debt contracts
restrictions in debt contracts may specify that dividends may paid only out of earnings generated after signing the loan agreement and only when net working capital is above a specified amount. also preferred dividends take precedence over common stock dividends.
6. rate of assets expansion
a high rate of assets expansion creates a need to retain funds rather than to pay dividends.
7. profit rate
a high rate of profit on net worth makes it desirable to retain earning rather than to pay them out if the investor will earn lesson them.
8. stability of earning
a firm that has a stable earning trend will generally pay a larger portion of its earnings in dividends. if earnings fluctuate significantly, a larger amount of the profits may be retained to ensure that enough money is available for investment projects when needed.
9. tax position of shareholders
the tax position of stockholders also affects dividend policy. corporations owned by largely taxpayers in high income tax brackets tend to ward lower dividend payout where as corporations owned by small investors and tend to ward higher dividend payout.
10. control
for many small firms and certain large ones, maintaining the controlling vote is very important. these owners would prefer the use of debt and retained profits to finance new investments rather than issue new stock . as a result dividend payout will be reduced.
11. access to the capital markets
a firm's access to capital market will be influenced by the age and size of the firm, therefore a well established firm is likely to have a higher payout ration than a smaller, newer firm.
1. desire of shareholders
shareholder may be interested either in dividend incomes or capital gains. wealthy shareholders in a high income tax bracket may be interested in capital gains as against current dividends. a retired and old person, whose sources of income is dividend, would like to get regular dividend in a closed held company, management usually knows the desire if shareholders. so, they can easily adopt a dividend policy that satisfies all shareholders. but in a widely held company, number of shareholders is very large and they have diverse desire regarding dividend and capital gains, some shareholder want cash dividends, while other prefers bonus share.
2. legal rules
certain legal rules may limit the amount of dividends a firm may pay. these legal constants fall in to two categories. first, statutory restrictions may prevent a company from paying dividends. while specific limitations very by state, generally a corporation may not pay a dividend (1) if the firm's liabilities exceed its assets , (2) if the amount of the dividend excesses the accumulated profits, and (3) if the dividend is being paid from capital invested in the firm. the second types of legal restrictions is unique to each firm and result from restrictions in debt and preferred stock contracts.
3. liquidity position
the cash or liquidity position of the firm influences its ability to pay dividends. a firm may have sufficient retained earnings. buy it they are invested in fixed assets, cash may not be available to make dividend payment. thus, the company must have adequate cash available as well as retained earning to pay dividends.
4. need to repay debt
the need to repay debt also influence the availability of cash flow to pay dividend.
5. restrictions in debt contracts
restrictions in debt contracts may specify that dividends may paid only out of earnings generated after signing the loan agreement and only when net working capital is above a specified amount. also preferred dividends take precedence over common stock dividends.
6. rate of assets expansion
a high rate of assets expansion creates a need to retain funds rather than to pay dividends.
7. profit rate
a high rate of profit on net worth makes it desirable to retain earning rather than to pay them out if the investor will earn lesson them.
8. stability of earning
a firm that has a stable earning trend will generally pay a larger portion of its earnings in dividends. if earnings fluctuate significantly, a larger amount of the profits may be retained to ensure that enough money is available for investment projects when needed.
9. tax position of shareholders
the tax position of stockholders also affects dividend policy. corporations owned by largely taxpayers in high income tax brackets tend to ward lower dividend payout where as corporations owned by small investors and tend to ward higher dividend payout.
10. control
for many small firms and certain large ones, maintaining the controlling vote is very important. these owners would prefer the use of debt and retained profits to finance new investments rather than issue new stock . as a result dividend payout will be reduced.
11. access to the capital markets
a firm's access to capital market will be influenced by the age and size of the firm, therefore a well established firm is likely to have a higher payout ration than a smaller, newer firm.
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