A dividend policy outlines how much, how often, and what type of distributions will be made to shareholders, and should consider future sales, net income, and earnings growth. The policy must also indicate the anticipated method of payments and be flexible enough to avoid disappointment.
The goal of any business is to achieve and increase profitability. Companies that list shares publicly on financial markets have choices about what to do with that proceeds. The money can be used to reinvest in the business, or it can be distributed to shareholders in the form of dividends. A dividend policy outlines the expectations for such payments, including how much, how often, and what type of distributions will be made.
When writing a dividend policy, keep in mind that some investors buy shares in a company based on the perception created from those proceedings. Dividend stocks provide a stream of income to investors, much like a conservative bond guarantee, in addition to the gains made in the value of the stock. If you set a dividend policy and expect that there may be future changes down the road, manage those expectations in the dividend framework so investors know what to expect. Provide historical context for stock price performance and returns so support for future returns is justified to investors within policy boundaries.
You must have an expectation and forecast of future sales, net income, and other earnings growth to establish a dividend policy. This is because future distributions to shareholders depend on continued profitability and growth. If, in the near future, an acquisition of some kind is anticipated, this could interfere with a company’s plans to pay dividends, and those payments may be halted or canceled entirely. Furthermore, if you are currently aware of future acquisition plans, it would be misleading for investors not to mention this possibility in the policy.
The frequency with which you intend to pay dividends to investors should also be outlined in a dividend policy. Most of these distributions are made quarterly, but could also be limited to annual payments. In addition, distributions can be made in cash or through additional shares to investors. A dividend policy must clearly indicate the anticipated method of payments.
Understand that a corporate board of directors must endorse the payment of dividends before distributions are made. When writing the policy, consider that you will need to obtain board approval to increase the value of a dividend if earnings exceed expectations in the future. Also, investors may become disappointed in response to lower dividends, so keep the policy flexible and realistic enough to avoid disappointment.
Smart Asset.
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