A dividend policy of a company determines how much of the earnings a company shares with its shareholders in the form of a dividend payment on a regular basis. Each company has its own dividend policy and it can vary significantly from one case to the next. Companies look at several factors when determining their dividend policy.
When determining the dividend policy, a company looks at its own mission statement and objectives to determine how much will be shared with stockholders. If the company values its shareholders significantly above everything else, it will try to give as much as possible to them in the form of dividends. If the company uses more debt to finance operations, it may not put as much of a priority on shareholders so it can retain more earnings.
Different companies value growth in different ways. New companies that are on the verge of expanding typically require more money than those that have been in business for many years. When a company needs to expand and grow, it will require more of its own money for this purpose. If a company has already expanded significantly, it may not need to retain as much of its earnings. The money can then be distributed to the shareholders of the company.
Volatility of Company Earnings
Another factor that can play into the dividend policy is the amount of volatility involved in the company's earnings. Companies that have a large amount of volatility are less likely to pay regular dividends than those that are stable. When a company can plan on a certain amount of earnings coming in every quarter, it makes it much easier to distribute regular dividends. If a company makes a large amount of money one quarter and then makes nothing the next quarter, dividends can suffer.
Governmental Restrictions and Taxes
Companies can also be influenced by government policies and tax laws. Some governments penalize corporations if they keep above a certain percentage of their earnings. In this case, it is to the company's advantage to issue more dividends to investors. Companies also have to consider the tax rates of dividends and corporate taxes when making the decisions. Each company has to evaluate the laws surrounding retaining earnings when determining a dividend policy for the future.