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Doea a dividend policy matter - Essay Example

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Dividends don’t play an important role according to the academic consensus. This consensus tells that it is not expected of the market to pay…
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Download file to see previous pages But the practitioners are of the opinion that dividend policies do play an important role in this regard. They provide examples in this regard that there are numerous companies whose share prices have jumped to a new high after their announcement to pay regular dividends. The process of paying dividend by companies is considered very important because it sends a powerful message to outsiders of the company about the future prospects of the organization. If an organization is able to pay out consistent dividends over time to its shareholders, it can be concluded by the general public that the fundamentals of the organization are very strong.
It should be noted in this regard that focusing solely on the dividend policy of an organization is not sufficient. The company must also have the money that is required to pay dividends to its shareholders. Any company’s sources of funds must equal its uses of such funds. If an organization pays dividends to its shareholders and this is considered as use of funds, there must be something that has to change in the uses and sources statement. In this regard it could be said that given the investment policy of the firm, the dividend policy decisions of any firm is dependent on the choice of its financing strategy. An organization has to take a decision in this regard whether it wants to rely heavily on external funds to finance its projects and then paying back those funds to the providers of finance in the form of higher dividends. The other way is to retain a part of its earnings to finance its growth. Ploughing back of profits is an important tool by which an organization can effectively finance its projects without relying too much on outside sources of funds (Miller, 1977, pp. 261-265). It can be said at this point that generous dividend policies may not be considered as the best for an organization. The organization’s ...Download file to see next pagesRead More
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