A dividend means the portion of earnings that is provided to stockholders.
Dividend policy: It means how much dividend would as a retained in a company and how much distribute to stockholders. All these related activities of a dividend are called dividend policy. It is the policy a company uses to structure its dividend payout to shareholders. It is the set of guidelines a company uses to decide how much of its earnings it will pay out to shareholders. It is the parameters used by a board of directors as the basis for its decisions to issue dividends to investors.
According to Weston and Brigham, “Dividend policy involves the decisions to payout earnings or to retain them for investment in the firm.”
There are three types of dividend policies: a stable policy, a constant policy, and residual policy.
It is important because it outlines the magnitude, method, type, and frequency of dividend distributions. The importance of dividend policy is as follows:
- The market price of the share;
- The internal source of finance;
- Stability of dividend policy;
- Fund flow;
- Investors satisfaction;
- Wealth Maximization.