Amity College of

Commerce and Finance

Dividend Policy

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 Amity College of
Commerce and Finance

OBJECTIVES OF DIVIDEND POLICY

• Firm’s Need for Funds

• Shareholders’ Need for Income

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 Amity College of
Commerce and Finance

PRACTICAL CONSIDERATIONS IN DIVIDEND

POLICY
• Firm’s Investment Opportunities and Financial Needs
• Shareholders’ Expectations
• Constraints on Paying Dividends
– Legal restrictions
– Liquidity
– Financial condition and borrowing capacity
– Access to the capital market
– Restrictions in loan agreements
– Inflation
– Control

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 Amity College of
Commerce and Finance

STABILITY OF DIVIDENDS
• Constant Dividend per Share or
Dividend Rate.
• Constant Payout.
• Constant Dividend per Share Plus Extra
Dividend.

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 Amity College of
Commerce and Finance

Constant dividend per share

policy

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 Amity College of
Commerce and Finance

Dividend policy of constant

payout ratio

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 Amity College of
Commerce and Finance

Significance of Stability of
Dividends

• Resolutions of investors uncertainty.

• Investors’ desire for current income.
• Institutional Investors’ Requirement.
• Raising Additional Finances.

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 Amity College of
Commerce and Finance

FORMS OF DIVIDENDS

• Cash Dividends
• Bonus Shares (Stock Dividend)

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 Amity College of
Commerce and Finance

Advantages of Bonus Shares

• To shareholders:
– Tax benefit
– Indication of higher future profits
– Future dividends may increase
– Psychological value
• To company:
– Conservation of cash
– Only means to pay dividend under financial difficulty
and contractual restrictions
– More attractive share price

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 Amity College of
Commerce and Finance

Limitations of Bonus Shares

• Shareholders’ wealth remains unaffected

• Costly to administer
• Problem of adjusting EPS and P/E ratio

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 Amity College of
Commerce and Finance

Conditions for the Issue of

Bonus Shares
• Residual reserve criterion
• Profitability criterion

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