Most business firms regard dividend retention as a primary source of financing as they believe that dividend policies payout ratio and the percentage of earnings paid shareholders reduces the number of earnings that the firms would have retained for future investment.
Thus, dividend decisions in one of the finance functions and decisions areas of the finance manager. Some investors believe that a low payout policy would lead to less current dividend and perhaps enhance the earnings capacity of the firm that would bring about higher capital gains and increase the market price per share.
While others argue that a higher payout policy would tend to increase or maximize shareholders wealth. Most investors or shareholders prefer a high payout policy that would enhance their current earnings capacity.
Rozeff (1982) argues that paying out funds to the shareholder as a dividend prevents managers from misusing or wasting funds. Also, Brealey, Myers, and Allen (2011) argued that in recent years, dividend payment and stock repurchase have amounted to a high proportion of earnings and concludes that through dividends remain the principal channel of returning cash to shareholders, most corporations do not pay the dividend to shareholders.
The issue of dividend payout policy up till now is empirical evidence concerning the relationship between dividend payout policy and firm performance. This examined the relationship between dividend payout policy and firm performance in Nigeria using data for 11 years.
The objective was to determine the influence of profit after tax (tax) and earnings per share (EPS) on dividend payout policy. Also, the study was an attempt to bridge the gap in the literature and therefore contribute to existing knowledge.
There has been a controversy over dividend payout policy and retention as it affects firms performance and its value to researchers. The review of related empirical literature was an attempt to guide the researchers in finding consensus or fill the gap in the literature.
Goergen, Correia and Renneboog (2004) used partial adjustment model to estimate the implicit target payout ratio and the speed of adjustment of dividends towards a long run target ratio and observed that German firms do not base their dividend decisions on published lower proportion of their cash flows than UK and US firms so as to build up their legal reserves.
DEFINITION OF DIVIDEND POLICY
A dividend policy is a policy that a company used to decide how much it will pay out to shareholders in the form of dividends. However, dividend policy is an important consideration for some investors.
As such, it is important considers action for company leadership, especially because company leaders are often the largest shareholders and have the most to gain from a generous dividend policy. Most companies view a dividend policy as an integral part of the corporate strategy.
TYPES OF DIVIDEND POLICIES:
- A residual dividend policy
- A hybrid dividend policy
- A stable dividend policy
A Residual dividend policy: A residual dividend policy is a type of dividend policy where dividends are based on the profits less the capital which the company retains to finance the equity portion of its capital budget and any residual profits are then paid out to shareholders.
The essence of the residual dividend policy is that the form will only pay dividends from left over after all suitable investment opportunities have been financed. Retained earnings are the most important sources of financing for most companies.
A residual approach to the dividend policy, as the first claim on retained earnings will be the residual dividend policy, the primary focus of the firms’ management is indeed an investment, not dividends. Dividend policy becomes irrelevant, it is treated as a passive rather than an active decision variable.
However, according to scholars. The view of management, in this case, is that the value of the firm and the wealth of its shareholders will be maximized by investing the earnings in the appropriate investment projects, rather than paying them out as dividends to shareholders.
Thus, the firm’s earnings in all acceptable (in terms of risk and return) investment projects, which are expected to increase the value of the firm. Dividends will only be paid when retained earning exceed the funds required to finance the suitable investment projects. conversely, when the total investment funds required exceeding retained earnings, no dividend will be paid.
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