Different companies have different polices regarding dividend, what factors affect dividend polices of an organization?

Answer:

The large numbers of factors influences an organization’s 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 organization.

1.      Legal requirements

There is no legal compulsion on the part of a company to distribute dividend. However, there certain conditions imposed by law regarding the way dividend are distributed. There are three rules relating to dividend payments. They are the net profit rule, the capital impairment rule and insolvency rule.

2.      Organization's liquidity position

Dividend payout is also affected by organization's liquidity position. In spite of sufficient retained earnings, the organization may not be able to pay cash dividend if the earnings are not held in cash.

3.      Repayment need

An organization uses several forms of debt financing to meet its investment needs. These debts must be repaid at the maturity. If the organization has to retain its profit for repaying debts, the dividend payment capacity reduces.

4.      Expected rate of return

If an organization has relatively higher expected rate of return on the new investment, the organization prefers to retain the earnings for reinvestment rather than distributing cash dividend.

5.      Stability of earning

If an organization has relatively stable earnings, it is more likely to pay relatively larger dividend than a organization with relatively fluctuating earnings.

6.      Desire of control

When the needs for additional financing arise, the management of the organization may not prefer to issue additional common stock because of the fear of dilution in control on management. Therefore, a organization prefers to retain more earnings to satisfy additional financing need which reduces dividend payment capacity.

7.      Access to the capital market

If an organization has easy access to capital markets in raising additional financing, it does not require more retained earnings. So a organization's dividend payment capacity becomes high.

8.      Shareholder's individual tax situation

For a closely held company, stockholders prefer relatively lower cash dividend because of higher tax to be paid on dividend income. The stockholders in higher personal tax bracket prefer capital gain rather than dividend gains.