Q:1 Bring out the significance of stability of dividend?

Ans: Significance of stability of business:

A stable dividend policy is advantageous on account of the following reasons:

a) Desire for current income:- Some investors like widows, retired persons
use the dividend income for meeting the daily living expenses. Such
expenses are constant. Stable dividend policy causes least inconvenience to
them.
b) Informational content:- when a company declares regular dividend,
investors accept the declaration as a sign of continued normal operations. A
reduction in the rate of dividend is considered as permanent fall in the
earnings. Many shareholders therefore sell their shares leading to fall in
price of shares. If the firm follows stable dividend policy it can avoid such a
situation.
c) Requirement of institutional investors:- Institutional investors and mutual
funds like UTI, LIC, educational institutions etc. generally prefer only such
companies which have a record of stability in their dividend rates.
Therefore to attract capital from them stable dividend policy would be
helpful.
d) Raising additional finance:- Many investors like a company paying stable
dividend. Therefore such a company can raise additional finance from the
investors easily.
e) Stability in the market price per share:- stable dividends help in
maintaining the stability in the market price per share.

Dangers of stability:

Greatest danger of adopting a stable dividend policy is that once it is established,

it cannot be changed without seriously affecting investors’ attitude and financial
standing of the company. If a company following a stable dividend policy misses
dividend payment in a year, this break will have a severe impact on the investors
than the failure to pay the dividend by a company with unstable dividend policy.
The cut in the dividend is considered as a cut in the salary. So the financial
managers must take this into account while framing the dividend policy of the
firm.

Forms of dividend:-

Dividend can be classified into different categories depending upon the form in
which they are paid.

1) Cash dividend:- The most usual practice is to pay the dividends in the form
of cash. Payment of dividend in the form of cash results in cash outflow.
2) Stock dividend (Bonus shares):- bonus shares are issued to the
shareholders as a result of capitalization of reserves. Shareholders will get
free shares from the company. Issue of bonus shares does not result in out
flow of cash.
3) Bond dividend:- When the company wants to declare cash dividends but it
does not have cash to pay the dividends, it nay issue bonds free of cost to
the existing shareholders. Recently HLL has issued bond dividend to the
shareholders free of cost.
4) Property dividend:- Here the company pays dividend in the form of assets
other than cash. This method is also rarely practiced.