when are dividends issued
Some of the key factors which influence dividend pay-out of a firm are delineated below.
 Liquidity
           Traditional theories have postulated that a dividend decision is solely a function of the firm. While earnings are important determinant for the dividend decision, the role of liquidity cannot be ignored. Dividend pay out entails cash outflow for the firm. Hence the quantum of dividends proposed to be distributed critically depends on the liquidity position of the firm. In practice, firms often face cash crunch in spite of having good earnings. Such firms may not be in a position to declare dividends despite their profitability.
 Investment Opportunities
           Another key determinant to the dividend decision is the requirement of capital by the firm. Normally firms tend to have low payout if profitable investment opportunities exist and conversely firms tend to resort to high pay-out if profitable investment opportunities are lacking. Generally, firms operating in industries which are in the growth phase of the product life cycle are characterized by high dependence on retained earnings. On the other hand, firms operating in industries which are in the maturity and decline stage normally distribute a larger proportion of their earnings as dividends.
 Access to Finance
           A company which has easy access to external sources of finance can afford to be more liberal in its dividend pay-out. The dividend policy of such firms is relatively independent of its financing decisions. Firms having little or no access to external financing have rather limited flexibility in their dividend decisions.
 Flotation Costs
Issue of securities to raise capital in lieu of retained earnings involves flotation costs. These costs include fees payable to the merchant bankers, underwriting commission, brokerage, listing fees, marketing expenses, etc. Moreover smaller the size of the issue, higher will be the flotation costs as a percentage of amounts mobilized. Further there are indirect flotation costs in the form of underpricing. Normally issue of shares is made at a discount to the prevailing market price. The cost of external financing has an influence on the dividend policy.
 Corporate Control
           Further issue of shares (unless done through rights issue) results in dilution of the stake of the existing shareholders. On the other hand, reliance on retained earnings has no impact on the controlling interest. Hence companies vulnerable to hostile takeovers refer retained earnings rather than fresh issue of securities. In practice, this strategy can be a double edged sword. The niggardly pay-out policy of the company may result in low market valuation of the company vis-à -vis its intrinsic value. Consequently the company becomes a more attractive target and is in the danger of being acquired.
 Investor Preferences
The preference of the shareholders has a strong influence on the dividend policy of the firm. A firm tends to have a high pay-out ratio if the shareholders have a strong preference towards current dividends. On the other hand, a firm resorts to retained earnings if the shareholders exhibit a clear tilt towards capital gains.
Restrictive Covenants
           The protective covenants in bond indentures or loan agreements often include restrictions pertaining to distribution of earnings. These conditions are incorporated to preserve the ability of the issuer/borrower to service the debt. These covenants limit the flexibility of the company in determining its dividend policy.
 Taxes
           The incidence of taxation on the firm and the shareholders has a bearing on the dividend policy. India levies a 12.5% tax on the amount of distributed profits. This tax is a strong fiscal disincentive on dividend distribution. These dividends are totally tax-free in the hands of the shareholders. The capital gains (long-term) are taxed at 20%.
 Dividend Stability
           The earnings of a firm may fluctuate wildly between various time periods. Most firms do not like to have an erratic dividend pay-out in line with their varying earnings. They try to maintain stability in their dividend policy. Stability does not mean that the dividends do not vary over a period of time. It only indicates that the previous dividends have a positive correlation with the current dividends. In the long run, the dividends have to be invariably adjusted to synchronize with the earnings. However the short-term volatility in earnings need not be fully reflected in dividends.
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About the Author:
Dr.R.SRINIVASAN is a Post graduate in commerce and Management. He received his doctoral degree from Alagappa University in 1997. He is now Working as an ASSOCIATE PROFESSORin Post graduate and Research Department of Corporate Secretaryship at Bharathidasan Government College for Women (Autonomous), Pondicherry University, Puducherry.He currently teaches Accounting ,financial management and Research Methodology Subjects. Before Joining BGCW, he was teaching in SNR College, Coimbatore, Sindhi college, Chennai& T.S.Narayanasamy College, Chennai for eight years. He was with the industry for a short term at Salzar Electronics Pvt. Ltd, Coimbatore. He has about 20 years of teaching experience and having research experience of 15 years. His interests are in Accounting and finance, Capital Market, Quantitative Methods. He underwent the Faculty Development Programme at Indian Institute of Management Ahmedabad during 2000-01. He has presented 20 papers in national and international conferences and has published twenty papers in the areas of Finance and Human resource Management in National Journals. Co-authored a book titled, ‘Investors Protection, published by Raj Publications, New Delhi He has delivered lectures in contemporary finance topics at Pondicherry University. He is involved in consultancy projects for Godrej Saralee, Chennai in the areas of Statistical Applications. He has supervised a number of research projects in the area of corporate finance and Human Resource Management. He is the Board of examiner in corporate Secretaryship and Management for the past two decades.
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Article Source: ArticlesBase.com – FACTORS INFLUENCING THE DIVIDEND POLICY—SOME THOUGHTS
Question: When can I use the dividend to pay my whole life premium?
the agent told me “just two more years and you can use the dividend to pay for the premium”. The wholelife policy was issued 15 years ago, is this correct info?
Let say i’m paying $100 premium and dividend earned for this year is $50, can I use that $50 towards the premium?
Answer: No, this is not correct info because by making that statement, the agent is in effect guaranteeing the dividend. This is a huge insurance no no. Dividends cannot be guaranteed. The dividend may be higher or lower or non-existent next year. You should call him or her out on it, and watch them stammer and say something about historical dividend rates. At which time you say, “but past performance cannot predict future results.” Sound like a familiar phrase?
Mark should not have to ask what type of policy this is, but he’s new to the biz and will learn.