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What is dividend and types of dividend policy?


Dividend: It is a part of profit distributed among shareholders. The shareholders invest their money in company to earn some gain in the form of dividends. Company re-invested some part of profit in business. So, when the company didn’t earn enough money than those re-invested funds is used for payments to shareholders as dividend. Sometimes, Company instead of distributing profit among shareholders re-invested the funds for further growth of business and in return company pay high dividend to shareholders in future.

Types of Dividend:
Cash dividend: It is a dividend paid in cash form. It is a normal form of paying dividend to shareholders.
Stock dividend: It is another form of dividend paid in shares form. It means the additional shares are given to existing shareholders in the form of dividend.
Scrip dividend: A company pay scrip dividend to its shareholders as a promise to pay dividend in future. Company issues notes or bonds to shareholders.
Property dividend: It is also a form of paying dividend to shareholders. It is non monetary form of paying dividend. If the company is not able to pay dividend to its shareholders in cash form than in that case it assets with market value.

Dividend policy: Company uses different dividend policies to pay dividends to shareholders. These policies guide the company how much company have to pay dividend to shareholders and in which form?

Types of dividend policy:
There are different types of dividend policy used by company such as:
·         Regular dividend policy: In this dividend policy the dividend paid to shareholders at regular rate. It helps to maintain the goodwill of the company and also the investors get the regular income. But the disadvantage is there is no growth in dividend rate.
·         Stable dividend policy: In this policy company pay fixed dividend to shareholders. There is no variation in dividend amount in any year. Company open a reserve account in which part of profit is invested. And when the company does not have enough money than those reserve fund are used for payment of dividend to shareholders.
·         No dividend policy:  According to this policy, company does have to pay any dividend to shareholders. The company re-invested those profits in business for further growth of a company.
·         Irregular dividend policy: The irregular dividend policy means company does not pay regular dividend to shareholders because company doesn’t have enough cash for paying dividend to shareholders. It affects the company’s goodwill and creditworthiness position.
       
      Dividend theories:
      There are two dividend theories i.e.
·         Relevance Theory
·         Irrelevance theory
      Relevance theory: This theory states that the dividend policy of the company helps to determine the value of the firm. The relevance theory is supported by the Walter and Gordon.

      Irrelevance theory: This theory states that the dividend policy of the company is not useful for determining the value of the firm. The irrelevance theory is supported by Modigliani and Miller. According to Modigliani and Miller in perfect market and no corporate tax etc the dividend policy does not affect the value of the firm or market value of share.

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