Module 8: Payout Policy

• It is the distribution of corporate profits to qualified shareholders, as determined by the company's board of directors.

  Dividend
• It is a policy a company uses to structure its dividend payout.

  Dividend Policy
• TYPES OF DIVIDEND POLICY:

  • Stable Dividend Policy
  • Constant Dividend Policy
  • Residual Dividend Policy
• Two Categories of Factors Affecting Dividend Policy

  • Internal Factors
  • External Factors
• INTERNAL FACTORS of Dividend Policy

  • Regularity and stability of earnings
  • Financial needs of the company
  • Desire of shareholders
  • Desire of control
  • Liquidity Position
• EXTERNAL FACTORS of Dividend Policy


  • State of Economy
  • State of Capital Market
  • Legal Restrictions
  • Taxation Policy
• It is the easiest and most commonly used. The goal of this policy is to

  provide shareholders with a steady and predictable dividend payout each year, which is what most investors seek. Investors receive a

  dividend regardless of whether earnings are up or down.

  Stable Dividend Policy
• The primary drawback of the stable dividend policy is that investors may not see a dividend increase in boom years. Under this policy, a company pays a percentage of its earnings as dividends every year. In this way, investors experience the full volatility of company earnings


  Constant Dividend Policy
• The residual dividend policy is also highly volatile, but some investors see it as the only acceptable dividend policy. With this policy, the company pays out what dividends remain after the company has paid for capital expenditures (CAPEX) and working capital.

  Residual Dividend Policy
• FORMULA of DIVIDENDS

  $Dividends\ =$$\ Net\ Income\ -\ Capital\ Budget\ \left(Equity\ \%\right)$
• FORMULA of PAYOUT RATIO

  $PayoutRatio\ =$$\ \frac{Dividends}{Net\ Income}$
• Company aims for a steady dividend payout every year irrespective of change in income.

  Stable Dividend Policy
• Specific percentage of the company's earnings is paid out as dividends every year.

  Constant Dividend Policy
• Company pays the dividends from the funds left after the finances after fulfilling capital expenditure requirements.

  Residual Dividend Policy
• TWO TYPES OF DIVIDEND THEORIES

  • Theories of Relevance
  • Theories of Irrelevance
• THEORIES OF RELEVANCE

  • Walter's Model
  • Gordon's Model
• THEORIES OF IRRELEVANCE

  • Modigliani - Miller Hypothesis (M.M. Model)