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Determinants of Dividend Payout Policies

by kraju

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Investors received a record quarterly payout from U.K companies during this quarter as the gross dividends they paid rose to £ 25.3 bn during this period. The total was £ 1.4 billion more than the previous record in the third quarter of last year, according to the quarterly dividend study by Capita Registrars. The total for the three months to the end of June benefited from £ 1.2 bn in dividends, most notably from mining group Antofagasta, which paid out £ 502 million. There were also one-off payments from Standard Life and ITV.

Dividend payout is considered to be important for investors, as it is perceived as a proof of a company’s well being. They are also beneficial for investors who are looking for a regular stream of incoime. In this article, International Finance Magazine analyzes the different factors affecting dividend policies and the procedures laid out in the HMRC and Companies Act 1985 for payment of dividend.

Lintner’s Theory - 1956

Lintner was one of the first to investigate the partial adjustment model of dividends. His behavioural model suggested that the change in dividend is a function of the target dividends payout less the last period’s dividends payout multiplied by the speed of an adjustment factor. Lintner found that the most important factor of a company’s dividend policy was a significant change in earnings.

Rozeff – 1982

He was among the first to explicitly recognize the role of insiders, he finds the dividend policy for unregulated firms is negatively related to its level of insider holdings.

Farelly and Baker- 1986

They made a survey for 562 firms listed on the NYSE about dividend policies in 1983. They received a total of 318 responses from manufacturing, utility, wholesale and retail firms, they analyzed and found that the important determinants of dividend payments were the expected future earnings and the pattern of past dividends.

Pruitt and Gitman -1991

They did a survey of 1,000 largest U.S. firms in terms of investment, financing and dividend decisions in their firms. The result showed that the important determinants of dividends policy are the current and past profit level, the volatility of earnings and the expected future earnings in terms of growth in earnings. They also found that the dividend declared in the past had an impact on the current dividends.


The Companies Act do not provide who shall declare a dividend and, in particular, do not require the dividend to be declared by the shareholders in general meeting. It is possible to lay down in the articles that the directors shall declare dividends. If the articles are silent as to the payment of dividends, they are payable only when declared by an ordinary resolution passed by the shareholders in the general meeting. If the articles provide that the dividends are not to be declared by an ordinary resolution passed by the shareholders in general meeting, the directors, under their general powers, will be entitled to declare a dividend without the sanction of a general meeting. Before declaring an interim dividend, the directors must satisfy themselves that the financial position of the company warrants the payment of such a dividend out of profits available for distribution. Section 270 of the Companies Act 1985 requires that companies determine the dividend declaration on “relevant items” and “relevant accounts”.

i)                   Relevant items: These are the profits, losses, assets, liabilities, provisions, share capital and reserves.

ii)                Relevant accounts: This will be the company’s latest annual accounts laid before the company in general meeting.

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