A dividend policy is a set of guidelines that a company uses to decide on how many parts of its profits will be given to the shareholders as a dividend. Foremost, approaches to dividends are as follows:
- Residual
- Stability
- Hybrid
Dividend policy
Dividends are those parts paid as a return on the company’s capital. Companies have been using dividends in this way for a long time. Typically, companies that pay dividends are corporations, and the company pays the dividends to shareholders through share buybacks or repurchases of shares. In business and personal life, it is essential to plan. A dividend policy is a way to do just that. A company may have a dividend policy that is a fixed amount per unit of stock, or it may be a variable amount, meaning that it will depend on the company’s performance. In a fixed amount policy, the amount of money that is paid out depends on whether the company is making more or less money than expected.
A company’s dividend policy has a direct effect on the dividends they pay out to their shareholders. It is essential for companies that hold their dividends as a primary form of profit to give dividends every quarter. Dividends are paid to shareholders, which are held in the form of stocks and share certificates. The most popular form of dividend policy is the cumulative dividend policy. In an investment account, the share price will fluctuate, affecting the dividend payout. An investor who owns shares of a company with a cumulative dividend policy would receive the dividends over the life of the policy.
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Concepts of dividend policy
The different concepts of dividend policy are as follows:
- Dividend payout ratios
- Dividend frequency
- Dividend yield
- Model of dividend discounting
- Model of dividend discounting with zero growth.
- Model of dividend discounting with constant growth.
Forms of dividend
There are five forms of dividend, which are as follows:
- Scrip dividend
- Cash dividend
- Bond dividend
- Optional dividend
- Property dividend
The crucial models that support dividends are:
- Walter’s model
- Gordon’s model
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