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Factors Effecting Dividend Policies



Dividend policy of a company is the strategy followed to decide the amount of dividends and the timing of the payments. A firm’s dividend policy is influenced by the large numbers of factors.

Factors Affecting Dividend Policy:

Some factors affect the amount of dividend and some factors affect types of dividend. The following are the some major factors which influence the dividend policy of the firm.

  1. Growth and Profitability

The amount of growth a firm can sustain and its profitability is related to its dividend decisions, so long as the firm (because of managerially imposed to external market constraints) cannot issue additional equity.

Firms with strong growth prospects maintain low target payout ratios. In fact all the firms that experience above-average growth rates are expected to have low dividend payout ratios since, in line with the residual theory of dividends, a greater number of profitable investment opportunities should result (other things being equal in a greater need for earnings retention.

This interrelationship among the firm’s growth, its profitability, and its investment, financing, and dividend decisions cannot be overemphasized.

  1. Liquidity:

The liquidity position of a firm is often an important consideration in dividend decisions. Since dividends represent a cash outflow, it follows that the better the cash position and overall liquidity of the firm, the greater is the firm’s ability to pay (and maintain) a cash dividend.

A growing, profitable firm may not be liquid, since it needs funds for new capital expenditures and to build up its permanent working capital position.

Likewise, firms in cyclical industries may experience times when they lack liquidity due to general economic conditions. Hence, the degree of liquidity is a variable of concern when a firm’s dividend policy is being assessed.

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