What is a Dividend Policy?

 

Dividend policy is a form of document that is designed by the management and decision makers of the company to decide the amount of dividend that must be paid to the investors.

When a Dividend is offered to the Share Holders

When a company shows

growth in its profit and other related outcomes several investors and shareholders want to invest in the company to take advantage from the increased value of the shares of the company. When a company is in growing process it means that it is rapidly consuming cash invested by the stockholders and investors so there is no dividend during the growth of the company.

A company issues a dividend when it has achieved a certain maturity in its growth and now the profit generated is enough to grant dividends to the investors. Some of the investors think that company is no more in growing mode and it is no more a growth oriented company so they sell their stocks to some other investors that are more interested in earning dividend rather than the growth of the company.

How a Dividend Policy is designed?

Management should design dividend policy that promises small dividends on the beginning so that the current cash flow and the resources remain well in control of the management. Sometimes the management decides to pay such a large amount of dividend that is difficult to gather and all the resources and cash of the company are consumed in coping up with the dividend. A company must keep in mind the negative impact of not issuing or halting the dividend as income oriented investor may sell their shares in the absence of any dividend.

 

 

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