Dividend Policy

Under market ratio, there are several ratios affiliated to dividend payments as aforesaid. This aspects are normally guided by dividend policy and the these policies result to diverse dividend payout ratios amongst firms in a particular industry as discussed hereunder


There are several ways we can define the term dividend policy. From my PhD thesis, I have borrowed some of those definitions based on the viewpoint of several authors as follows;

Definition-1: Dividend policy is a scheme and a rule followed by the management to reward the owners of the firm for investing their financial resources in a venture (Nissim & Ziv, 2001).

Definition-2: Dividend policy is a plan that guide management to distribute the returns of a firm to the common stock investors using diverse forms of dividends within a certain period of time (Kehinde and Abiola, 2001)

Definition-3: The scheme followed by a firm to distribute income, aims at achieving specific goals (Brigham & Ehrhardt, 2012).

From those definitions, several types of dividend policies arise which are explained as follows;

a). Stable Dividend Policy; it entails yearly payment of regular installments of a specific cash dividend quantity regardless of company return fluctuations (AP Gwilym et al. 2000). Examples of such dividend policies are; fixed payout policy, fixed dividend per share policy and low-regular plus extra dividend policy.

b). Constant Payout Policy; it involves fluctuating periodical distribution of cash dividend to shareholders for the dividend plan is guided by a predetermined fixed proportion of the firm earnings.

c). Low-Regular Plus Extra Policy; it involves payment of low regular dividends supplemented by an additional dividend whenever the company earnings are good or higher than normal in a given dividend period. The dividend strategy is convenient to the management for it matches low income seasons and high income periods with low to high rates of cash dividend in that order. This dividend arrangement creates confidence to shareholders for they are assured of at least some returns even during the loss making periods of the firm and also share improved returns when the firm has made some extra income in a particular period of time (Marsh, 2012).

About the Author - Dr Geoffrey Mbuva(PhD-Finance) is a lecturer of Finance and Accountancy at Kenyatta University, Kenya. He is an enthusiast of teaching and making accounting & research tutorials for his readers.