Briefly explain the different types of Dividend-payout policies

The different type of Dividend Pay-out policies can be roughly categorized as follows:

  • The “bird-in-the-hand view, whereby the shareholders  or owners prefer to be paid high dividend. Here, the shareholders only think of getting immediate dividends over less certain and more distant capital gain.
  • Pay a low payout ratio as shareholders prefer capital gains over dividends. ( In some countries  capital gains are taxed at a lower/zero rate than dividend);
  • The Merton Miller & Franco Modigliani’s theory which advocates that a company’s stock market value is relatively insensitive to its choice of dividend policy. Accordingly, as dividend is a passive decision, hence management should first determine its capital investment program and then pay out as dividends whatever cash is left over.
  • No right answer to which dividend payout policy to use. Management strongly believe that dividend policy or changes do plays a very important role as it is able to signal to the existing or potential investors regarding changes in management’s expectations as to the company’s future earnings.

With the different types of thought in dividend payout, therefore, there is really no right answer to the right dividend payout ratio. However, the company should attempt to review the range of feasible target payout ratios together with the range of customary payout ratio and any special shareholder mix consideration.




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