Dividend policy is the set of guidelines a company uses to decide how much of its earnings it will pay out to shareholders. Some evidence suggests that investors are not concerned with a company's dividend policy since they can sell a portion of their portfolio of equities if they want cash.
Dimensions of Dividend Policy
1) Funds requirement
The funds required for forecasting prepares context of long range planning and consequently considerable funding needs tend to keep their payout ratio rather low to conserve resources for growth.
2) Liquidity
Dividend entitles cash payment. Hence, the liquidity position of the firm has a bearing on its dividend decision. A firm may be unable to distribute more than a small fraction of its earning, despite to do so, because of insufficient liquidity.
3) Access to external sources of financing.
The firm which has difficulty in raising finance externally is likely to lean heavily on internally generated funds.
4) Shareholder preference
The preference of shareholders may influence the dividend payout ratio of the firm.
5) Difference in the cost of external equity & retained earnings
The cost of external equity, expecting that which is raised by way of rights issue, is higher than the cost of retained earnings. Two factors cause this difference: Issue cost & under pricing.
6) Control
External finance, unless it is through a right issue, involves dilution of control. If the finance is raised by public, the existing shareholders will have to share control with new shareholders.
7) Taxes
Presently dividend income is tax exempt in the hands of investors.
