The dividend policy comprises all aspects of dividend payments such as stability of dividend rate, time of payment, methods of payment, forms of payments etc. while formulating dividend policy covering all these aspects, one has to carefully study not only the company’s requirement but also the interest of shareholders. Some other economic factors must also be considered. Thus factors affecting dividend policy may be put into three categories

Ownership factors  

  1. Current income requirements of the shareholders
  2. Alternative uses of funds by shareholders
  3. Tax Consideration of shareholders

Company oriented factors

  1. Legal or contractual constraints
  2. Liquidity, credit standing and working capital requirement
  3. Need for expansion and diversification
  4. Business Cycle
  5. Dividend policies and shareholder’s relationship
  6. Availability of external capital
  7. Inflation

Other Factors

  1. Nature of Business
  2. Attitude and Objection of Management
  3. Composition of Shareholding
  4. Restriction by the financial institution
  5. Age of the company
  6. Corporate tax policy
  7. Public opinion.

(Students must refer the FINANCIAL MANAGMENT BY S.P. GUPTA book for a detailed explanation of these points)