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Laceda
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. This evidence is called the "dividend irrelevance theory," and it essentially
indicates that an issuance of dividends should have little to no impact on stock price.
External Considerations
3. State regulation:
The management must formulate the dividend policy within the overall legal frame work which
may prescribe rules to regulate pattern and mode of income distribution.
4. Tax policy:
Dividend policy is also affected in part by tax policy of the Government. Tax incentives may
lead to liberal dividend policy.
Internal Considerations
4. Age of company:
An old and established company having reached saturation point may follow a high pay out
policy, where as young and growing concern cannot follow, it, as it requires large amount of
funds to finance its growth requirements.
7. Repayment of debt:
If the company wants to repay the debt, it has to follow conserve dividend policy.
8. Ownership of company:
In a closely held company with a few but affluent stock holders, the management will always
retain larger share of the profits so as to reduce tax liability of the stockholders.
9. Restrictions in debt agreements:
In case the company is indebted with long-term debt the financial manager must examine
carefully the provisions of debt agreements and decide about dividend payments accordingly.
10. Control:
Control is also an important factor that influences the pattern of income distribution. The issue of
additional common stock for procuring funds dilutes control to the detriment of the existing
stock holders who have dominating voice in the company.