Shareholders look into the capability
of companies to initiate a dividend. Dividends are payments made by a company to a shareholder usually after a company earns
a profit (Wikipedia 2007 [online]). Since dividends are money divided to shareholders after a profit, it is not considered
a business expense but a sharing of recognized assets among shareholders. Dividends are either paid regularly or can be called
out anytime. Consequently, a dividend policy is a set of company rules and guidelines used to decide how much the company
will pay out to its shareholders (Investopedia 2007 [online]).
A dividend policy is first known as
a heavy factor in a company’s stock value. However, more scholars are suggesting that corporate dividend policies do
not matter and should not matter in a company’s stock value (Investopedia 2003 [online]). Arguments against dividend
policies start from the fact that investors can create their own dividends on other investment option. A wise investor can
look at more stable bonds to earn a return of investment rather than a dividend policy that can fluctuate. Secondly, earning
from dividends is taxed higher than capital gains (Investopedia 2007 [online]). For these reasons, investors are not lured
to relative corporate dividend policies of companies as an accurate value of their stock.
Some companies believe that a no-dividend
policy is just as sound as companies with a dividend policy. Companies without a dividend policy can use their profit earnings
to reinvest and expand the company shares or buy assets. Having a dividend policy foregoes these opportunities.
For people who value profit certainty
of a company, a sound dividend policy is important. It follows that a high and regular corporate dividend policy means that
companies have a benchmark for doing well. Therefore, more dividends can equate to the overall health of the company. Dividend
policies are more valuable to small companies or cooperatives with excess cash and a few good projects where the net present
value of these projects is positive. Meanwhile companies, without excess cash but have several good projects where NPV is
also positive will only derail the undertaking of current projects. While a good corporate dividend policy is equated to excess
cash, the value of the company is not hinged on the value of dividends as there are other indicator’s of a company’s
performance.
There are different kinds of dividend
policies. First, residual dividend policy is a method of distribution where dividends are paid after all the requirements
for capital are met. Thus, dividends are computed from the residual cash after spending on new capital goods. The aim of this
dividend policy is to decide if there is enough money left after all costs are met.
A cyclical policy or stable policy
is a regular dividend payout usually given every quarter. A cyclical dividend policy is set at a fixed fraction of quarterly
earnings while a stable policy is set as a fraction of yearly earnings. This produces certainty for investors that they get
regular income for their investments.
In the end, the value of dividend policies
falls on investor decisions. While there are contrasting views of its usefulness, the most important factor is achieving the
best bang-for-buck.
References
Investopedia Staff. (2003). How and
Why Do Companies Pay Dividends?. Available: http://www.investopedia.com/articles/03/011703. Last accessed 18 October 2007.
Investopedia. (2007). Dividends. Available:
http://www.investopedia.com/terms/ d/dividendpolicy.asp. Last accessed 18 October 2007.
Wikipedia. (2007). Dividends. Available:
http://en.wikipedia.org/wiki/Dividend. Last accessed 18 October 2007.
