Dividend decision is concerned with deciding how much of the profit earned by a company is to be distributed to shareholders and how much should be retained in the business.
The factors affecting the decision are:
(i) Earnings : Earnings are a major determinant of dividend decision as dividends are paid out of current and past earnings. If the earning of the company is high it means that the higher dividends could be declared by the company to its shareholders along with maintaining a good amount of retained profit for future contingencies.
(ii) Growth Opportunities : If a company has good growth opportunities, it pays out less dividend. This is because, the extra profit will be used to help the company in the growth and expansion. This in any way is beneficial for the shareholders in the long run as due to growth prospects the earnings of the company will increase in the near future and in the long run the dividend will increase.
(iii) Shareholder’s preference : It is kept in mind by the management before declaring dividends. If the shareholders want to have more dividend the management will declare higher dividend in order to attract more investment in the form of new share capital to be issued.
