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Discuss the Factors Influencing the Dividend Payout in a Firm.

In: Business and Management

Submitted By yjboyz
Words 942
Pages 4
1. Profitability
A firm which has stability of earnings may formulate a more consistent dividend policy than those having an uneven flow of incomes. This is because they can predict easily on their savings and earnings. Therefore, investors always prefer to invest in those companies. Usually, enterprises dealing in necessities suffer less from oscillating earnings than those dealing in luxuries or fancy goods.
2. Expectations of shareholder
Although the rate of dividend is decided by the directors, the expectations of the shareholders having a strong influence on the dividend payout of the firm. On the other hand, the firm may resorts to the retained earnings if the shareholders were desire toward the capital gains or dividend.
Typically, shareholders expect two types of returns, there are [i] Capital Gains: i.e., an increase in the market value of shares. [ii] Dividends: regular return on their investment.
Cautious investors look for dividends because It reduces uncertainty (capital gains are uncertain). Besides, it is also an indication of the company’s financial strength. Some investors may be invested in shares so as to get regular income to meet their living expenses.
3. Financial Needs of the Company
If the company has profitable projects and it is costly to raise funds, it may decide to retain the earnings. Typically, companies tend to have low-paid if there is a profitable investment opportunities.
On the contrary, companies often resort to high-paying if the profitable investment opportunities are lacking. In general, the product life cycle stages of growth of the industry, there is characterized by high dependence on retained earnings. On the other hand, firms operating in industries which are in the maturity and decline stage normally distribute a larger proportion of their earnings as dividends.
4. Desire to the control of management
Some

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