It is a distribution of part of the earnings of the company to its equity shareholders.

1. Cash Dividend - Cash dividend is the most popular form of dividend payout. In this, company issues the dividend to all shareholders where the money is deposited in the bank accounts of shareholders as per the holdings of the investors.

2. Stock Dividend / Bonus Share - If any company issues additional shares to common shareholders without any consideration then the action becomes stock dividend.

3. Property Dividend - Any company can issue any non-monetary dividend to its shareholders. The issued property dividend would be recorded against the current market price of the asset distributed.

4. Scrip Dividend - When any company doesnt have enough funds to pay dividend then it may choose to pay dividend in the form of promissory note to pay the shareholders at a later date. This essentially creates a note payable.

5. Liquidating dividend - When the board of the company thinks of returning the original capital invested by the shareholders then it is known as the liquidating dividend. This may happen due to the fact the company intends to wrap up the business.

Nature of Business: The nature of business has an important bearing on the dividend policy.

Age of Company: The age of a company has more impact on the distribution of profits as dividends. A newly started and growing company may require much of its earnings for financing expansion programs or growth requirements and it may follow a rigid dividend policy.

Liquidity position of a company: Generally, dividends are paid in the form of cash, hence, it entails, cash. Although a firm may have sufficient profits to declare dividends, it may not have sufficient cash to pay dividends. Thus, the availability of cash and the sound financial position of the firm is an important factor in making dividend decisions.

Equity share holder's preference for current income: Legally, the Board of Directors has the discretion to decide the distribution of the earnings of a firm. The shareholders who are legal owners of the firm appoint the (BOD’s). Hence, directors have to take into consideration owners’ preferences, while deciding dividend payment.

Legal Rules: Legal rules restrictions are significant as they provide the framework within which dividend policy is formulated. In other words, the dividend policy of a firm has to be evolved within the legal framework and rules and regulations.

Financial Needs of a company: This is one of the key factors, which influence the dividend policy of a firm. Financial needs mean funds required for foreseeable future investment.

Access to capital market (External source): Access to the capital market means the firm’s ability to raise funds from the capital market.

Control Objective: Control over the company is also an important factor, which influences dividend policy. When a firm distributes more earning as dividends in the form of cash it reduces its cash position.

Inflation: Inflation is the state of the economy in which the prices of products or goods have been increasing. Inflation is a factor that influences dividend policy indirectly.

Dividend policy of competitors: Keeping one eye on competitors’ dividend policy is very important. If the firm wants to retain the existing shareholders or it wants to maintain share price in the market, and if it is planning to raise funds from the public for expansion programs, it has to pay dividends at par with its competitors. Hence, it is one of the factors that influence the dividend policy of a firm.

General State of Economy: The level of business activity of an enterprise and so also its earnings is subject to general economic and business conditions of the country.

State of Capital: If the state of the capital market is relatively comfortable and raising funds from different sources, the management may tempt to declare high dividends.

State Regulation: The management must formulate the dividend policy within the overall legal framework which may prescribe rules to regulate the pattern and mode of the income distribution.

Tax Policy: Dividend policy is also affected in part by the tax policy of the Government. Tax incentives may lead to a liberal dividend policy.

Company's investment opportunities and shareholder's preferences: The appropriate dividend policy of a company is designed in light of the company’s investment opportunities and stockholders’ preferences.

Nature of Company's Business: The nature of the business activity of the company influences largely the level of income.

Access to capital market: A company which is access to the capital market can raise funds and earn reasonable profits and can formulate a liberal dividend policy.

Age of a company: An old and established company having reached saturation point may follow a high payout policy, whereas young and growing concerns cannot follow, as it requires a large number of funds to finance its growth requirements.

Growth rate of a company: A rapidly growing concern requires long-term funds. Hence, its dividend must be kept at a minimum.

Liquidity position of a company and its fund requirements: Acompanywithhighprofitability and large reserves may not necessarily have sufficient cash balances to pay cash dividends particularly when most of the sales have been affected through credit, in such a situation it would be unwise to drain off additional cash by paying dividends.

Growth and Profitability: The amount of growth a firm can sustain and its profitability is related to its dividend decisions, so long as the firm (because of managerially imposed external market constraints) cannot issue additional equity.

Liquidity: The liquidity position of a firm is often an important consideration in dividend decisions. Since dividends represent a cash outflow, it follows that the better the cash position and overall liquidity of the firm, the greater is the firm’s ability to pay (and maintain) a cash dividend.

Cost and availability of alternating forms of investing: The ability of a firm to raise money externally will have a direct bearing on the level of dividends paid to shareholders.

Managerial Control: In some cases, control of the firm may be a factor to consider when establishing a dividend policy.

Legal constraints: The legal rules act as boundaries within which a company can declare dividends.

Access to the Capital Market: Another matter for consideration by management in setting an appropriate dividend policy is the company’s ability to obtain cash on relatively short notice.

Inflation: Inflation must be taken into account when a firm establishes its dividend policy.

External Restrictions: The protective covenants in a bond indenture or loan agreement often include a restriction on the payment of cash dividends. This restriction is imposed to preserve the firm’s ability to service its debt.
These restrictions may be in the form of coverage ratio, sinking fund, etc. The presence of these restrictions forces a company to retain earnings and follow a low payout.

A three-for-two bonus issue entitles each shareholder three shares for every two they hold before the issue. A shareholder with 1,000 shares receives 1,500 bonus shares (1000 x 3 / 2 = 1500)

The most common split ratios are 2-for-1 or 3-for-1 (sometimes denoted as 2:1 or 3:1), which means that the stockholder will have two or three shares after the split takes place, respectively, for every share held before the split.

A business with a residual dividend policy holds zero excess cash at any given point in time. All spare cash must be either reinvested in the business or redistributed among the shareholders.

Many investors find dividends attractive because they provide a regular stream of income. Usually, dividends are paid out quarterly (in line with the company’s earnings reports), but in certain instances, a company may choose to pay out a special or irregular dividend.

In theory, a residual dividend policy is more efficient than a smooth dividend policy. If at any point in time a business can find no further profitable investments, then they should return any spare cash available to the shareholders so that the shareholders may use the cash to invest in other projects that they believe will be profitable.

Thus, a residual dividend policy ensures that cash is efficiently distributed toward profitable investments. Under a smooth dividend policy, the management of a business may invest spare cash into unprofitable or unnecessarily risky projects only because funds are available.

A residual dividend policy usually requires fewer new stock issues and lower flotation costs. However, a variable dividend policy may send conflicting signals to investors. It also represents an increased level of risk for investors, as dividend income remains uncertain.

Perfect Capital Markets: This theory believes in the existence of “perfect capital markets”. It assumes that all the investors are rational, they have access to free information, there are no flotation or transaction costs, and no large investor to influence the market price of the share.

No Taxes: There is no existence of taxes. Alternatively, the tax rate for both dividends and capital gains are the same.

Fixed Investment Policy: The company does not change its existing investment policy. It means whatever may be the dividend payment, the company will make the investment as it has already decided upon. If the company is going to pay more amount of dividends, then it will have more equity shares and vice versa.

No Risk of Uncertainity: All the investors are certain about the future market prices and the dividends. This means that the same discount rate is applicable for all types of stocks in all time periods.

Investor is Indifferent between Dividend Income and Capital Gain Income: It is assumed that investor is indifferent between dividend income and capital gain income. It means if he requires the total return of Rs. 500, he may get Rs. 200 dividend income and Rs. 300 as capital gain income or reverse, in either of the case he gets equal satisfaction.

Perfect capital markets do not exist. Taxes are present in the capital markets.

According to this theory, there is no difference between internal and external financing. However, on considering the flotation costs of new issues, it is false.

This theory believes that the dividends does not affect the shareholder’s wealth. However, there are transaction costs associated with the selling of shares to make cash inflows. This makes the investors prefer dividends.

The assumption of no uncertainty is unrealistic. The dividends are relevant under the certain conditions as well.

Modigliani – Miller’s theory of dividend policy is an interesting and different approach to the valuation of shares. It is a popular model that believes in the irrelevance of dividends. However, the policy suffers from various important limitations and thus, is critiqued regarding its assumptions.