Dividend decision relates to how much of the company’s net profit is to be distributed to the shareholders and how much of it should be retained in the business for meeting the investment requirements.
This decision should be taken, keeping in view the overall objective of maximising shareholders’ wealth.
Factors affecting dividend decision :
Amount of Earnings
Dividends are paid out of current and past earnings. Thus, earnings is a major determinant of dividend decision.
Stability in Earnings
A company having higher and stable earnings can declare higher dividends than a company with lower and unstable earnings.
Stability of Dividends
Generally, companies try to stabilise dividends per share. A steady dividend is given each year. A change is only made, if the company’s earning potential has gone up and not just the earnings of the current year.
Growth Opportunities
Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment. The dividend declared in growth companies is, therefore, smaller than that in the non-growth companies. .
