Every company which is listed and is making profits has to take the decision regarding the distribution of profits to its shareholders as they are the ones who have invested their money into the company. This distribution of profits by the company to its shareholders is called dividend in finance parlance, every company has different objectives and methods and dividend is no different and that is the reason why different companies follow different dividend policies, let’s look at various types of dividend policies –
- Regular dividend policy – Under this type of dividend policy a company has the policy of paying dividends to its shareholders every year. When the company makes abnormal profits then the company will not pay that extra profits to its shareholders completely rather it will distribute lower profit in the form of the dividend to the shareholders and keep the excess profits with it and suppose a company makes loss then also it will pay dividend to its shareholders under regular dividend policy. This type of dividend policy is suitable for those companies which have constant cash flows and have stable earnings. Investors like retired person and conservative investors who prefer safe investment and constant income will invest in constant dividend paying companies.
- Stable or constant dividend policy – Under this policy the dividend payout ratio is kept stable, so for example if a company decides to fix the payout ratio as 10 percent then the company will keep paying dividends at 10 percent rate to its shareholders. Now if the profit of the company is 10 million dollars then the company will pay 10 percent of 10 million that is 1 million as dividends to its shareholders, however if the profits reduce to 1 million then dividend will also reduce by one tenth. Hence in a way dividend will fluctuate with profits of the company under this policy and investors cannot be sure about the exact amount of dividend which they will receive leading to the lack of confidence among shareholders of the company.
- Irregular dividend policy – Under this type of policy there is no mandate to give dividends to shareholders of the company and top management gives it according to its own free will, so suppose company has some abnormal profits then management may decide to pass it fully to its shareholders by giving interim dividend or management may decide to use it for future business expansion. Companies which have irregular earnings, lack of liquidity and are afraid of committing itself for paying regular dividends adopt irregular dividend policy.
- No dividend policy – Under this policy company pays no dividend to its shareholders, the reason for following this type of policy is that company retains the profit and invest in the growth of the business. Companies which have ample growth opportunities follow this type of policy and shareholders who are looking for growth invest in these types of companies because there is plenty of scope of capital appreciation in these stocks and if the company is successful then capital appreciation will outdo regular dividend income as far as shareholders are concerned.