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What is Dividend Policy?

Different companies have different approaches to dividends: whether to pay them, whether it’s a fixed amount in the budget or dependent on the kind of expenses they incur each year.

These and other considerations make up what is known as a company’s dividend policy. Companies may have a different phases in their development that will lead them to adopt different dividend policies along the way. As a young company in the Growth category, the dividend policy will most likely be not to distribute any dividends.

It is too important at that stage to put money back into the company and grow. Later in their growth, the company may adopt a dividend policy that is residual, paying dividends out only after everything else has been taken care of. While there may be a dividend every year, it is not a huge priority for the company to keep it consistent.

Last is a stable dividend policy, in which the company attempts to keep loyal shareholders around for the long-haul, and dividends may be increased slightly year-to-year when sustainable. Companies that consistently pay and increase their dividends are highly sought after. Companies may decide to pay dividends quarterly or annually or at other increments.

Sometimes these are considered interim dividends, being declared before a year’s earnings are determined. Often the interim dividend will be lower than the end-of-the-year dividend, to give the company a cushion in case their earnings are not what they expected.

Keywords: dividend, retained earnings, growth stocks, capital appreciation, interim, dividend policy,