Dividend policy Flashcards
What is a dividend?
is a cash payment made to the shareholders as a reward of their investment - can be in the form of dividend income and a capital gain (or loss from selling a bond/share). Dividends come from net profit.
When is a dividend paid?
a distribution of after tax earning is usually paid semi annually (twice per year), interim (mid year) and final (after year end). It is recommended by directors and approved by shareholders at AGM
What is Xd or ex-div?
Dividend will be paid to those holding the shares on this date - 2-3 weeks, processed after 48 hours.
What is a cum-div?
The price of the share between announcement and ex-div date (cum is Latin word for ‘with’)
When will share price fall?
Share price will fall on ex-dividend date as the shareholder who buys immediately after the Xd date does not have the right to receive the dividend.
What is done to maximise shareholder wealth?
- primary objective of management - maximise shareholder wealth, maximise company value/share price.
- return to shareholder - dividend (income), increases in share price (capital growth)
How are dividends measured?
for one company: dividend per share (DPS) e.g. D0, D1 in DGM.
for multiple companies: dividend yield = DPS/share price
What is the dividend decision?
considers how much the company should retain to reinvest in the company and howe much it should distribute to shareholders (dividend). If the company has a positive NPV project in which to invest the money, should it retain the funds rather than having to raise funds externally?
How much can dividends be?
- dividends can only be paid out of distributable profits (companies)
- lenders will put constraints on dividend payments (restrictive covenants)
- liquidity = dividend is cash, so company has to have cash to make the payment. A real limiting factor for many companies.
- investment opportunities - retained earnings are a major source of finance.
Why can dividends be irrelevant?
