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What Are the Determinants of Dividend Policy?

Professional consultants can aid in making sure the dividend policy is in compliance with all legal restrictions.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 27 October 2014
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Establishing a dividend policy is important for business that intends to provide stock issues for investors. There are several determinants of dividend policy that are taken into account, including the desire to remain within the parameters of current trade regulations, and to protect the financial stability of the company. Considering all relevant factors and their impact on the operation makes it easier to create a policy that is fair to the business and still attractive enough to motivate investors to buy and hold the shares over the long term.

One of the major determinants of dividend policy is current regulations that apply to the issuing of stocks and the dividends connected with those shares. Here the focus is on making sure that the company policy is in full compliance with current law, with no provisions that may allow the potential for undermining those legal restrictions. At the same time, the terms of the policy must be in line with the founding documents of the company, a factor that helps to further increase the chances of remaining in full compliance with applicable laws and regulations.

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Another of the key determinants of dividend policy has to do with considering the financial viability of the company itself. Since dividends are paid out of the profits of the business, it is important to make sure those provisions do not exhaust all the profit realized in any given period. By placing some limitations on the amount of profit that can be allocated to paying out dividends, the business is able to utilize at least a portion of that profit for expansion and enhancement projects, or even to purchase investments that create additional revenue streams that further solidify the finances of the company.

Specifics about the industry in which the company functions is also among the more important determinants of dividend policy. The general appeal of that industry to potential investors, the amount of money to be made, and even the potential for expansion are all worth consideration. If market conditions indicate that the company is working within a stable environment with some promise of growth, this will have some impact on how the dividend policy is structured, since this impacts what level of profits company owners and investors can reasonably expect to realize over time.

Creating a strategy that appeals to investors is also among the more important determinants of dividend policy. Simply put, the policy must provide the opportunity for an equitable level of return that is in line with the risk that investors take on when purchasing the shares. Should investors feel the potential returns are not balanced with that risk, they will simply move on to other opportunities.

The combination of determinants of dividend policy will often include considerations that are uniquely related to the specific business. Company goals for the future, expectation of a change in the general economy, the possible shift in demand for the products produced, and even the chances for events to slow or interrupt production will all have some relevance when creating a workable policy. Fortunately, company owners are not left alone in this task. Professional consultants can aid in making sure the dividend policy is in compliance with all legal restrictions, is balanced to reflect the wishes of investors and the interests of the company, and is likely to serve well in all types of economic conditions.

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