It is the policy that directs the decision of the distribution of dividends to the shareholders. It is a financial policy that involves a dividend payout ratio. It provides guidelines to the board of directors about the dividend distribution. The company makes the decisions to maintain a balance between debt and equity composition.
Some people call it irrelevant but it is the income made by shareholders. Company leaders are the largest shareholders gaining from various dividend policies.
How important is it to have a dividend policy in a company?
As already mentioned, it is the financial policy. It is utterly important to have a well-established dividend policy in a company. It adds value and makes the company financially stronger. Besides, it tends to lift the reputation of a company among its shareholders, and also drive demands in the stock market.
A solid policy attracts the shareholders, pushes them to invest which in return maximizes the investment returns of a particular company. It promises future success and growth. The policy gives an explicit direction for how profits would be distributed, allocated, and assigned with the goals of an organization so that the money matches the mission of the company.
Dividend Policy Assignment Help Online discusses the importance of dividend policy:
• The investors get to know about the company
Though it doesn’t affect share price (share price gets affected by valuation and the fluctuations in the market). It is an important factor that investors must consider when they wish to invest in a particular company. It gives an indication to the investors about the company and the returns they can invest in.
• It is supposed to provide internal direction
It sets a discipline level that a company must follow to let the cash flow. With this policy, the profits could be allocated meticulously.
• It builds trust
A good dividend policy suggests a well-managed and profitable growth of the company. It helps to build a sense of trust among the shareholders of a company.
• It also adds credibility
Dividend policy predicts the future prospects and performance of the company beforehand.
Some people call it irrelevant because it gives authority to the investors to create “homemade” dividends. The analysts claim that often investors look for steady growth of income and prefer to invest in bonds where interest payments remain the same rather than investing in a dividend-paying stock where value can fluctuate. Because the interest payments remain the same, those who own such bonds don’t prefer worrying about the dividend policy of a company and it becomes irrelevant sometimes.
Nevertheless, there is no hard and fast rule book to create a dividend policy however most include the company objective, its intention, and the strategic long vision of the company. A board of directors unanimously decides what necessary piece of information must be included in a dividend policy. The dynamics of the company are also affected by the dividend policy and the information used while forming it. Dynamics Assignment Help is what a company has to go for and see what all is getting affected by the use of dividend policy and what all changes are required to make.