Dividend denotes that percentage of the gains distributed as a reward to the shareholders. Whereas, taking decisions concerning the financial administration of an organization, the management has to choose between distributing the net profits amongst the shareholders and reinvesting back the net profits into the commercial venture for future advancement. Dividend policy remains one of the mainly controversial concerns in finance. Nevertheless, it is also the most significant aspect financial policy, not merely from the perception of the organization, but additionally from the viewpoint of customers, shareholders, employees, government, and regulatory bodies. Scholars on financial matters have engaged in wide-ranging theorizations to explain why businesses should recompense or not recompense dividends. Corporations frequently pay out portions of their gains to shareholders in percentages to the sum of stock they encompass. The dividends are the major reason as tow why numerous investors purchase stock. As with numerous aspects regarding corporate management, the rational behind dividend payout policies are intricate and not often intuitive. Dividend payouts are only out of the profits of the commercial venture. For this motive, an organization taking losses will encompass no dividends for distribution. The boards of directors commonly establish the total dividend payouts it wishes for a period, commonly annually or quarterly, founded on varied factors. These influences may entail previous performances of the business, the present fiscal wellbeing of the organization alongside the alternative procedures to which may require capital employment.
As aforementioned, dividend characterizes a share gain distributed to the shareholders of an organization in accordance with the assured payout ratio or further precisely depending on certain dividend policies. Prudent commercial ventures save their finances pending opportunities coming up for acquisition, which have a tangible effect on the earnings. Excluding that, commercial ventures can opt to return finances to shareholders in the form of dividends instead of buybacks. Shareholders can then opt whether to purchase additional shares of the company with their dividend revenue or to utilize the finances on something different. Although dividend payments result in taxations for investors, they offer the individuals more control when compared to share buybacks (Besley & Brigham, 2012, P. 181).
The bulk of managers establish certain long-term constant objectives for dividend distribution relative to the gains of the target payout period. However, they fail in mechanically spreading over the ratio to every year’s gains, as they try avoiding brusque fluctuations that could aggravate actions in investors’ situations in imperfect markets. Organizations should recurrently verify whether their dividend distribution policies are dependent on only profits or also on additional influences. The dividend policies of payouts do not solitarily rely on business gains. The financial and economic factors alongside institutional factors, which are in practice, determine the dividends payable by a company. Dividends, which are representative of the earning shares that companies distribute to their shareholders, are payable in the form of stock or cash. Additionally, they are enduring in nature since they characterize the retributions distributed to shareholders following the accomplishment of the company’s obligations. Consequently, the management allocates finances for reinvestment into the venture (Moles et al, 2011, P. 57).