What is the dividend policy?

Dividend policy has become one of the most controversial issues in business Finance, as it determines the value of a company. Therefore, the dividend policy takes into account the cash flows that are most important to finance the growth of the company, as well as the cash flows accumulated to compensate the shareholders.

Dividend policies are an important part when analyzing the returns a company can generate. When a company earns profits from its business, it accumulates in retained earnings on the balance sheet.

Once a company's dividend policy is defined, any changes it makes in the future have a great impact on the market's view of business prospects, which is why great care should be taken in choosing the dividend policy. as a dividend.

Types of dividend policy

The main attractions of investing in any company's shares are focused on obtaining additional profitability through possible dividend distributions that can be made based on the company's operating results. The types of dividend policies vary by company, so it's very important to take them into account when making an investment decision.

For this reason, the dividend policy establishes the criteria that the company will follow in approving a dividend distribution and within these are contemplated:

• Criteria for the distribution of dividends: which can range from what percentage of benefits you get on your billing, to how many consecutive years the company has to give benefits to make the distribution.
• Criteria for the distribution of dividends: when these are in the form of cash and when in the form of shares.

It is worth remembering that there are no dividend policies that are better than others, but there are more or less attractive dividend policies for the investor.

Relationship between dividend policy and share value

The adoption of a specific dividend policy directly affects the value of the share, not only the distribution of the dividends themselves.

That is why a company that typically pays out few dividends, or rather a very low percentage of dividends on its earnings, will end up being worth more on the stock exchange, since the dividend payout is discounted by the share price.

The same goes for the case in which the distribution takes place through new shareholdings, as the overall value of the company will be diluted among a greater number of shares.

Corporate strategies for paying dividends

There are different types of dividend policies and they all have different importance within the company. We'll show you the following ways companies distribute dividends to shareholders:

• Stable dividend: It consists in the fact that the amount of dividends per share paid is constant and does not reflect changes in short-term earnings that a company may have. It means that, if a certain company has a fluctuation in its earnings in a quarter, the amount per share it will pay will be the same. Being this type of dividend policy it is one of the most common.
• Constant dividend distribution ratio: It consists of determining a constant percentage of profits to be distributed as dividends.
• Residual dividend policy: It is based on distributing only funds that remain available after all investment projects with a positive NPV have been funded.

What is a stock dividend?

Stock dividend is a distribution of profits, through which a public limited company distributes to its shareholders paid-up shares of its own issue or shares of open joint stock companies owned by the company. That is, a portion of the profit that the company undertakes to deliver to shareholders by the end of the financial year. In the absence of annual results, it relies on its own estimates and calculations to define the amount of money to distribute.

How is the stock dividend calculated?

Dividends per share are calculated taking into account the result of dividing the portion of profits that will be distributed to shareholders by the number of shares or stakes, it is called a dividend per share. A shareholder will receive a profit proportional to the capital he has invested.