Dividend
Dividend is a part of net profit distributed to shareholders ( Both equity and preference shareholders) of the company. The dividend paid to the shareholders is depends upon the company’s net profit and dividend policy.
Dividend Policy
Dividend policy refers to the decision regarding the distribution of dividend to the stockholders. The dividend policy describes whether distribute all or a part of net profit as a dividend or retain in the organization for the expansion of business. Generally companies who run in profit distribute dividend yearly. But sometimes companies do not distribute dividend although they earn large amount of profit. It all depends on the company’s dividend policy. The company can adopt stable, constant or residual dividend policy. Here, you can find the brief description about three types of dividend policy.
1. Stable Dividend Policy
Under stable dividend policy the companies pay stable or predictable dividend every year irrespective of the earnings. Company’s earning may up and down but it manage the predictable dividend payout by withholding all extra-ordinary income in peak years to maintain dividend amount during lean years.
2. Constant Dividend Policy
Under constant dividend policy the company pays fixed percentage of dividend from it’s earning. Shareholders receive higher dividend when the company earns more profit and lower or no dividend in lean years. It means that the amount of dividend fluctuates with fluctuation in the company’s earnings.
3. Residual Dividend Policy
Under residual dividend policy, the company pays dividend from the balance amount that remains after capital expenditures. The company adopting this dividend policy first focuses on the capital expenditures to manage growth and expansion of business and then distribute the remaining profit if any to the shareholders as a dividend. Companies needing huge amount of fund to manage growth and expansion of the business adopt this type of dividend policy.