(i) Stability Earnings: Other things remaining the same, a company having stable earning is in a better position to declare higher dividends. As against this, a company having unstable earnings is likely to pay smaller dividend.
(ii) Growth Opportunities: Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment. Thus in growth companies, payment of dividend will be less as compared to non-growth companies.
(iii) Cash Flow Position: The payment of dividend involves outflow of cash. Hence if the company is facing shortage of cash, they will pay less dividend. Hence cash flow position affects dividend payment.
(iv) Taxation Policy: The choice between the payment of dividend and retaining the earnings is affected by the difference in the tax treatment of dividends and capital gains. If tax on dividend is higher, it is better to pay less dividends. If tax on dividend is less, higher dividends may be declared. Dividends are free of tax in the hands of shareholders but, a dividend distribution tax is levied on companies.
(v) Shareholders’Preference: While declaring dividends, management must keep in mind the preferences of the shareholders. Some shareholder& general desire that atleast a certain amount is paid as dividend. The companies should consider the preferences of such shareholders .
(vi) Taxation Policy: If the tax on dividends is higher, it is better to pay less by way of dividends. But if the tax rates are lower, higher dividends may be declared. This is because as per the current taxation policy, a dividend distribution tax is levied on companies. However, shareholders prefer higher dividends, as dividends are tax free in the hands of shareholders.
(vii) Stock Market Reaction: Generally, an increase in dividends has a positive impact on stock market, whereas, a decrease or no increase may have a negative impact on stock market. Thus, while deciding on dividends, this should be kept in mind.
(viii) Access to Capital Market: Large and reputed companies generally have easy access to the capital market and, therefore, may depend less on retained earnings to finance their growth. These companies tend to pay higher dividends than the smaller companies.
(ix) Legal Constraints: Certain provisions of the Companies Act, place restrictions on payouts as dividend. Such provisions must be adhered to, while declaring the dividend.
(x) Contractual Constraints: While granting loans to a company, sometimes, the lender may impose certain restrictions on the payment of dividends in future. The companies are required to ensure that the dividend payout does not violate the terms of the loan agreement in this regard.
