More about Dividends
Dividend payout of a company is the percentage of its earnings it pays in cash to its shareholders. Dividend payout reduces the amount of earnings retained in the company and affects the total amount of internal financing. Hence, it must be viewed in relation to the overall financing decision.
The three decisions, namely, dividend, financing and investment decisions, are inter-related and inter-dependent. Given the investment needs of a company, higher the amount of retained earnings, lower will be the need for external finance. Therefore, a company should try to achieve an optimal combination in these three vital decision areas in order to maximise its shareholders’ wealth.
Dividend does matter and is a ‘primary and active’ decision variable. The conventional corporate wisdom specifies that variables such as income, stability, investment opportunities, cost of alternative financing and the tax bracket of shareholders help to guide management in this important decision. Dividends received today have more value than those received tomorrow because of time value of money. These considerations should be taken care of in the dividend payout decision of any company.
Dividend is the reward to the shareholders of joint stock companies. The relationship between dividend payments and corporate earnings and the changes in the payout ratio have a significant effect not only on the current income of the shareholders but also on the value of corporate securities, total investment, and the nation’s economic growth and stability.
Dividend distribution has an effect on the savings of the household sector. For economic growth, this pattern of savings generated by the household sector is of great importance to the planners who are entrusted with the task of planning. The prediction regarding the amount of such savings requires information about long-run dividend pay-out policies. The better the dividend the more will be the inducement to save and invest. Dividend is thus not merely a private expectation, but a matter of national interest. Companies are a channel through which capital flows from individuals to industry.
Corporate dividend policies help in creating a healthy investment climate for rapid economic development of the country. The corporate saving pattern in an economy is influenced to a considerable extent by the corporate dividend policy. Corporate savings is an important source of corporate liquidity and investment potential and is inversely related to the changes in the dividend payout policies.