Explain any six factors affecting the dividend decision of a company.

The chief factors affecting dividend decision are the following:

(i) Earning: The dividend is paid out of the present and reserved profits. Therefore, greater amount of total profit will ensure greater dividend.

(ii) Stability of Earnings: A company having stable earnings is in a position to declare more dividends and vice-versa.

(iii) Stability of Dividend: Every company adopts the policy of maintaining the stability of dividend per share. (Here the stability of dividend means that the dividend will, in no case, be allowed to fall. It is always good if the dividend remains stable or increases.) From this point of view, a little change in profit should not be allowed any increase or decrease in the dividend.

(iv) Growth Opportunities: If the company has more opportunities for growth, it will require more finance. In such a situation, a major part of the income should be retained and a small part of it should be paid as dividend.

(v) Cash Flow Position: The payment of dividend results in outflow of cash. It is possible that the company may have enough income but it is equally possible that it may not have sufficient cash to pay dividend. In this way, the cash flow position of the company is a factor that determines the dividend decision. The better the cash flow position of the company, the better will be the capacity of the company to pay dividend.

(vi) Shareholder Preference: There are two types of shareholders from the point of view of investment: (a) those who invest with the purpose of getting some regular income and (b) those who invest in the company to gain capital profit. If the majority of the shareholders are of the former type, the company must declare dividend according to their expectation. On the contrary, if the majority of the shareholders are of the latter type the company enjoys freedom about declaring dividend.