Explain the following as factors affecting dividend decision: i Stability of earnings; ii Growth opportunities; iii Cash flow position and iv Taxation policy. (2024)

Factors affecting dividend decision are:i Stability of earnings. A company having a stable growth in the earning pay regular dividend than a company with unstable earnings.ii Growth opportunities. Companies retain some money out of their earnings to finance their future investment and expansion requirements. Thus if a company foresees any growth opportunity the dividend declared is smaller.iii Cash flow position. Payment of dividend involves an outflow of cash. Availability of liquid cash should be ensured before declaring dividend.iv Taxation policy. The taxation policy of government affects the dividend decisions in two ways:a The tax rate on net profit of business affect the amount of dividend declared by the company. Higher is the tax rate lower will be the dividend.b The dividend policy of the firm is also influenced by the tax status of the shareholders. If dividend income is taxable shareholders will prefer bonus shares/capital gain instead of dividend.