Dividend Policy

Learn about the different types of dividend policies, how to set a policy that fits
your company, and how to evaluate the policy's effectiveness.

by payal chandak
Types of Dividend Policies

Cash Dividend Stock Dividend Hybrid Dividend

The company pays out a portion The company issues additional A combination of cash and stock
of profits to shareholders in cash. shares of stock to existing dividends is offered.
shareholders as a dividend.

Dividend Reinvestment
Plan (DRIP)

Dividends are automatically

reinvested in additional shares of
stock.
Setting a Dividend Policy

1 Assess capital needs 2 Analyze shareholder 3 Study competitor

preferences policies
Consider future
investments, debt Understand what Review dividend policies
obligations, and cash shareholders want from of competitors in the
reserves when setting dividends, including industry to ensure your
dividend policy. frequency and amount. policy is competitive.
Evaluating a Dividend Policy
Dividend Yield Dividend Payout Ratio Retention Ratio

Compares the amount of Compares the total dividends Calculates the percentage of
dividends paid per share to paid to the net income of the earnings that are retained by
the stock price. company. the company.
Impact of Dividend Policy
Tax implications
Dividend payments are taxed differently
than capital gains, which could impact the
perceived value of the company among
investors.
1 Shareholder confidence
Stable and increasing dividends can boost
shareholder confidence and attract new
2 investors, while an unstable dividend
policy could have the opposite effect.
3 Access to capital
A generous dividend policy could impact
a company's ability to raise capital for
future investments or growth
opportunities.
Factors Influencing Dividend Policy

Financial Performance Board of Directors Industry Competition

A company's dividend policy is The board sets the dividend policy The company's dividend policy is
influenced by its financial and determines when dividends influenced by the policies of
performance, including growth in are paid. competitors in the industry.
revenue and net income.
Ex-Dividend Date

1 Definition 2 Impact on Stock Price 3 Timing of Purchase

The ex-dividend date is the When the stock goes ex- Investors must purchase
first day the stock trades dividend, the price the stock before the ex-
without the dividend. typically drops by the dividend date to receive
amount of the dividend. the dividend.
Dividend Policy Examples
Apple Inc.
Apple has a stable dividend policy, with quarterly
dividends and a low payout ratio of around 28%.
They have shown a track record of increasing
dividends over time.
Berkshire Hathaway Inc.
Berkshire Hathaway does not pay dividends, instead
using profits to reinvest in the company. They believe
this approach will generate greater value for
shareholders over the long term.