Moreover, we will discuss practical examples of companies that give dividends and purchase their own shares. Similarly, the process of determining the disbursement of dividends is discussed in this paper.
In an organization share holders are of utmost importance because they buyout the shares of the company and certain affairs of the company are carried out because of share holders. Therefore, organizations take care of their shareholders by giving them dividends. The profit of the company is either reinvested in the company or the share holders are given dividends. Usually, shareholders receive dividends with respect to their share holding in the company. However, giving dividends to the shareholders is a critical method and it is considered as the core decision making element of the company (Madura, 2008). Proper brainstorming and decision making capabilities is essential for in this process because through dividends shareholders are motivated more to invest in the company. There are certain forms of giving the dividends like dividends are distributed on cash basis and they are known as cash dividends. These dividends are distributed through checks and these are taxable in the recipient in the year when they are actually paid. Certain dividends are distributed in the form of additional shares and in certain cases dividends are given in the form of property and they are known as property dividends.
However, the distribution process is based on certain characteristics and it is one of the crucial decisions for the top hierarchy of an organization. Divided policy of the organization is considered to be an important element in determining the distribution of dividends. This policy revolves around the idea of payout earnings versus retaining and then reinvesting them. The dividend policy includes certain factors like: How frequent the company would pay dividends What are stable or irregular dividends What is high or low dividend payout
Investor preferences and theories of dividend policy
Dividends are paid to the shareholders in order to keep them attached and interested with the company. Usually, there are three theories of dividend policy these are:
Bird in the hand
This theory is widely used in the process of distributing dividends. However, this policy arises that the investors are indifferent between the phenomenon of dividends and retention-generated capital gains. Investors have the tendency to create their own policy that if they want cash they can sell their stocks (Mishkin & Eakins, 2008). Similarly, if they don't want cash then they can use dividends to buy the stock. This model was proposed by Modigliani and Miller but it was based on unrealistic assumptions. The core aspect of this theory is that investors are not concerned about the company policy on dividends because they have the choice of selling portfolio of equities if they are interested in having cash. The issuance of dividends should have negligible or no impact on the stock price.
Investors think that the dividends of the company are less risky as compared to the future capital gains, therefore they prefer dividends.