Dividend is the real (in the sense ordinary) means of a company to compensate its shareholders for their equity investment. From the profits made in a year, a fraction is retained for the provision of increased working capital and any growth initiatives or any other liability; and the rest should of the amount be distributed to the shareholders. The ratio of dividend to the current market price of the company share is called dividend yield. Dividend could be in the form of cash, stock, property, products, promissory note, scrip, etc. Payment of dividend is highly regulated by the law and dividend strategy is a key corporate strategy.
Went to prepare a dividend policy? Distribution of dividend is minimal in the growth phase of a company and it increases as the company reaches the state of stable, profitable operations.
An investment in a company might be the only major source of earning of certain individuals. They need liquidity for personal expenses or for other Investments. They have two ways of getting money from the company:
2. Selling the shares
The process of selling the shares is as good as disposing of the source of income. It also makes them lose the control over the company. If a company never pays dividend, or does not pay it reliable, or page very less dividend after many years without corresponding substantial increase in in the valuation of the company, then the investors lose interest in the company. That is why a company should pay dividend from time to time. The ability of the company to pay dividend is seen as its strength.
Many companies belonging to the small and medium enterprises in India commit a lot of errors with respect to the Dividend policy.
1. They don’t have a written down Dividend policy
2. The difference in liquidity requirement by various shareholders leads to disputes in management.
3. The company’s capital is is irretrievably lost to the shareholders and company finds difficult to raise new capital
4. The dividend payments are made independent of the growth phase of the company
5. The directors of the company receive salaries in place of receiving dividend; this results in substantial reduction in profit or also, sometimes accounting loss of the company. This makes it very difficult for a company to raise equity capital.
6. Many small and medium enterprises adopt root of salaries than root of dividend forwarding the investors. No objection is taken as the company is held in the family are very closely held. However, it becomes very difficult to restructure the salaries if a new investor wants to come in and desire that the salary should be at par with the market levels.
Apohan prepares the dividend policy of the company in line with the applicable laws, in line with the business strategy of the company & and in line with the growth phase of the company.