Finance is about finding the right balance between risk and reward for an investor. Knowing this, it’s essential to understand what factors affect dividend policy. These include company objectives, financial resources, competitive outlook, and liquidity needs.

One of the main objectives of a company is to earn a profit — as well as pay dividends either quarterly or annually, depending on investors’ preference. However, if a company doesn’t have the right financial resources to pay dividends to its investors, it may not be able to maintain paying them. The company may have to cut back on current and future dividend payouts to concentrate on growing its business while making the necessary resources available for the industry to flourish. Here are some tips on factors affecting dividend policy.

1. Type of Industry

This refers to the type of business a company is operating in. For example, specific industries have more demanding financial resources than others. That is because these industries may involve higher investments in manufacturing or technology and other operational expenses. Thus, investors need to consider the type of industry when making decisions about dividend policy and the risks involved.

Dividend policy is affected by the type of industry in a company. Companies in capital-intensive businesses, such as airlines and oil services, are more likely to pay dividends than those in service sectors like health care and technology. These sectors require large amounts of cash on a day-to-day basis to keep their businesses going. Therefore, these companies don’t get enough money to reinvest or pay dividends.

2. Ownership Structure

This is how a company is owned by its investors. Companies in which most of the shares are held by institutional investors or banks that can afford to contain large amounts of stocks, like mutual funds and pension funds, are usually the first to pay dividends. On the other hand, companies with many individual shareholders who prefer cash dividends or equity payouts do not pay dividends. Companies that don’t pay dividends will usually buy back their stocks to be able to reward their shareholders.

3. Age of Corporation

Companies that have been around longer and have already earned profits usually pay dividends. These companies typically have a high cash flow to reward their investors. However, a company’s dividend policy is not determined solely by its age of a company. It depends on how much cash is needed to continue paying dividends every month or quarter while still being able to invest in more productive areas of business.

The longer a corporation has existed, the more likely it is to have a dividend policy. Corporations that have been around for at least 10 or 15 years usually have a dividend policy because they need to reward investors and do something with their money. Corporations just starting out will often reinvest all their profits into their businesses, so they can continue growing and reaching their goals.

4. The Extent of Share Distribution

This refers to how investors own many shares of a company. If a company is only issuing bonuses and splits, it might also have a dividend policy. However, if it is issuing dividends but only gives a small number of dividends to its investors, then there might be problems with the dividend policy. Investors may not receive enough cash to pay their household bills, or corporate-level employees may be unable to pay their salaries.

Not much company cash is usually available to pay dividends in the first few years of its existence. So, the dividend policy becomes more critical when a corporation has been around for less than five years. Some companies don’t have enough cash to pay dividends and may not pay them at all.

​5. Different Shareholders’ Expectations

Different shareholders have different dividend expectations. What is considered a rich dividend may not be high enough for some investors. A company should think that if it has the necessary resources to pay higher dividends, it will justify higher prices for its shares.

6. Leverage

A company that has to pay off high amounts of debt every month can’t afford to pay dividends, so it is either paying off its debt or reinvesting it in the business. The main objective of a corporation is to earn profit and pay dividends, so it keeps its operations growing while paying off its debt. If the company has too much debt, then the money it needs will be used up paying off instead of being available for investors. To be able to pay dividends, the company needs enough resources to be able to pay the dividend, which includes profit.

Dividends are reports sent to shareholders about the income received by a company. The amount of money paid as a dividend is usually more than half of a company’s quarterly profits. These dividends are also distributed to all shareholders, which is why they are essential to some investors while others consider them insignificant.