Factors Influencing Dividend Policy, Dividend Relevance and Reasons for Payment and non-Payment of Dividend

Dividend payment represents one of the methods through which investors earn a return on investing in a certain firm. For common stock holders however their dividends are not a guarantee since in most cases the dividends must first be recommended by the management before the shareholders can declare (approve) their payment in the annual shareholders meetings (HM Revenue & Customs n.d). Such a process thus means that individual investors who rely on dividends as their return on investment could lose if the management does not recommend the dividends or the shareholders disapprove of the payment at the annual meetings. This perhaps informs the increasing concern with what determines the dividend policy of a company.

The search of a method that explains how companies determine whether or not to pay dividends and the amount to be paid – if any – has attracted many schools of thoughts. One of these views dividend payment as a positive method through which companies influence their stock prices in the market by attracting investors (Frankfurter & Wood 2002; Azzopardi 2004). A second school of thought however undertakes that dividends may actually bear negative outcomes on the stock price while the third school sees no influence of dividend policy on an entity’s stock prices in the market (Frankfurter & Wood 2002; Azzopardi 2004). Such wide views and at times opposing perspectives on the effect of dividend policy bring about a number of questions. The first of these regards to what aspects firms consider to be important before declaring a certain amount of dividend. Secondly, is a question of what would lead to a firm following a constant dividend policy despite the theoretical models not supporting such a payout ratio.

To understand the importance of dividend policy to an entity, this paper aims to evaluate the major factors that influence a firm’s dividend policy and the purpose for paying dividends. This will be through a review of literature to collect statistics and identify the trend in dividend payment in different corporation. Based on the reviewed literature and identified trends, the paper then discusses whether there exists any optimal dividend policy, which would be applicable to different companies. Finally the paper concludes by making a summary of the main points discussed. Go to part 2 here.

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