FINANCIAL MANAGEMENT WEEK 11 LAQ

Explain the different types of dividend policies.

Dividend policy refers to the strategy a company uses to distribute profits or earnings to its
shareholders. There are several types of dividend policies that a company can adopt,
depending on its financial situation, goals, and the preferences of its investors. The key
dividend policies include:
1. Regular Dividend Policy: Under this policy, a company pays dividends to its
shareholders at fixed intervals, typically on a regular schedule, such as quarterly or
annually. The payments are often in the form of a fixed amount per share or a fixed
percentage of earnings. This policy provides stability and predictability to
shareholders.
2. Stable Dividend Policy: Similar to the regular dividend policy, the stable dividend
policy aims to provide consistent and predictable dividend payments. Companies that
adopt this policy typically strive to maintain a stable dividend amount over time. Even
if earnings fluctuate, the company tries to avoid large variations in dividend
payments.
3. Residual Dividend Policy: In this policy, a company first meets its capital
expenditure and working capital requirements from its earnings. After covering these
expenses, any remaining earnings are distributed as dividends to shareholders. This
approach ensures that the company invests in growth opportunities before paying
dividends.
4. Dividend Irrelevance Theory: This theory, proposed by Modigliani and Miller,
suggests that dividend policy is irrelevant because the total return to shareholders
(dividends and capital gains) is primarily determined by the company's earnings and
risk profile. According to this theory, investors are indifferent between dividends and
capital gains, and a company's value is unaffected by its dividend policy.
5. High Dividend Payout Policy: Under this policy, a company distributes a significant
portion of its earnings as dividends to shareholders. Companies with mature
operations and steady cash flows may opt for this policy to reward shareholders with
consistent income.
6. Low Dividend Payout Policy: Companies following this policy retain a substantial
portion of their earnings to reinvest in the business for future growth and expansion.
They typically offer lower dividend yields but may achieve capital appreciation over
time, making their stock appealing to investors seeking capital gains.
7. No Dividend (Zero Dividend) Policy: Some companies, especially young startups or
growth-focused firms, may opt to retain all earnings and not pay any dividends. These
companies reinvest profits to fund research, development, acquisitions, and
expansion. Investors in such companies typically rely on capital appreciation.
8. Special Dividend Policy: A company may issue special or one-time dividends when
it has excess cash or realizes exceptional profits. Special dividends are typically
higher than regular dividends and are often used to distribute windfall gains to
shareholders.
9. Script Dividend Policy: In this policy, shareholders have the option to receive
dividends in the form of additional shares (scrip) rather than cash. It allows the
company to conserve cash while still providing a return to shareholders.
The choice of dividend policy depends on various factors, including the company's financial
position, growth prospects, investor preferences, and economic conditions. Companies may
also change their dividend policies over time to adapt to changing circumstances and
shareholder expectations.