DIVIDEND, time to cheers or not?

Dividend

A monetary gift from firms to its investor. The term "dividend" usually refers to a cash distribution of earnings. If it comes from other sources, it is called "liquidating dividend. It is mainly, a distribution of a portion of company’s earning, decided by the board of directors, to a class of its shareholder. Though, could be in the form of cash, shares of stock and other property, but, in India, companies generally distribute cash dividend.

Companies maintain their dividend policy, in accordance with firm’s long term goal and strategy. 

Companies may maintain stable 

• Dividend payout policy (maintaining a steady amount of dividend irrespective of firm’s financial statement’s scenario), 
• Target Payout ratio (a fixed ratio of dividend to earning is maintain throughout),
• Constant Payout ratio(a company payout a specific percentage of its earning, so the amount of dividend changes with the earning), 
• Residual dividend model(dividend is based on earning left after retaining a portion of profit for the firm), which is in sync with the firm’s longs long term goal and mission.

Larger the dividend payout, lesser is the retention earning, lesser the dividend payout, higher is the retention earning, So, dividend policy is generally controversial.

There is proper procedure, which is being followed by a firm before actually distributing the dividend.

Dividend payout policy starts with 

• Declaration date (is the day on which board of directors, approves the payment of dividend), then comes the ex-dividend date (investor buying hare on ex-dividend date or after ex-dividend, will not receive dividend), followed by 
• Holder of record date (date on which stock holders who will receive dividend are recognised).Last but not the least come the 
• Payment date, when the dividend is actually paid out to the investors.

As per the famous economists Modigilani and Miller, dividend policy has no factual relevance on the share price, nor does it have any role in cost of capital. As investor has ability to make homemade dividend.

Let say, an investor is not in for cash dividend; in that case the cash dividend he receives can use it to buy more shares for the same company. 

It has also been seen, when company announces dividend, share price fall approximately by the same amount. M&M also stated in their theory that investors weigh capital gains and dividend on same scale. Duo in their theory also stated that what matter and what affects the share prices on factual term is the long term strategy and investment policy of a firm. Share prices are not highly affected by the dividend paid by the government.

However, divided to be a reason of rejoice, depends on how an investor values a dividend.  For an investor looking for a regular income from his investment will be happy to receive cash dividend. However, investor interested in capital gain, will be neutral towards dividend received.

So, dividend has different meaning to each and every individual depending on their own preferences and financial goals. Higher taxation on dividend also diminishes the shine of dividend. Thus, investor often prefers capital gain to dividend gain.

When we own share of a company, we wish company to earn more profit, so to reach the goal of sustainable profit, company must undertake profitable projects and investments policy. If a company will have capital of its own, it will help lower cost of capital to undertake the project, thus will push firm towards attaining its sustainable long term goal. For the stated reason, some investor finds retaining capital more favourable rather than distributing them in the form of dividend.

Dividend is a controversial issue, paying divided has its own pros and cons, depending on how investor views the divided aligning with his long term strategy and goal.

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