The science of enterprise economics has developed three approaches to determining a company's dividend policy. All of them are discussed in the table below.
Types of dividend policy Type of dividend payment method
Conservative Dividends are paid when the company's development costs are fully met, if resources remain. The size of the shares is fixed.
Moderate (compromise) A fixed amount of dividends is paid in any case; when the company receives excess profits, the size of the shares increases.
Aggressive The size of dividends is steadily increasing, payments are made systematically.
Conservative dividend payment methodology
The conservative method involves moj database paying dividends when the company fully meets its needs for financial resources necessary for further growth. Here, the ratio of the internal rate of return and the weighted average cost of capital is taken into account. If the former is higher, then the largest share of the profit is directed to increasing the funds of the company's owners.
The advantage of such a policy is obvious – it allows ensuring the financial stability of the company. However, it is unattractive for investors, since it makes dividend payments unstable. This approach is typical for newly formed JSCs that have not yet managed to use the financial resources attracted from investors in production.
Conservative dividend payment methodology
A compromise method for paying dividends
A compromise approach involves a guaranteed systematic payment of profit shares in a fixed amount. These funds are indexed proportionally to inflation. If the enterprise receives a profit in an amount exceeding the planned values, a certain part can be added to this payment amount. In this case, a dividend yield coefficient is used, which allows calculating the volume of shares for future periods.
The advantage here is the ability for investors to calculate the minimum guaranteed amount of funds that they will receive even if the share price falls. The disadvantage is the low correlation of the dividend amount with the company's financial position. Guaranteed payments are balanced by their low size in order to protect the company from factors that destabilize its stability.
Case: VT-metall
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In case of determining the guaranteed and additional amount of dividends to shareholders, a systematic payment is made in absolute amount. If the economic situation improves, the company pays extra dividends. In this case, the investor can count on a certain amount, as well as additional payments.
Another advantage here is the guaranteed income of investors, which can be planned, as well as the high degree of dependence of their volume on the market position and financial activities of the company - as profits grow, so do payments to shareholders. However, if the economic situation worsens, dividends may remain at a low level for a long time, which will reduce the attractiveness for investors and force them to direct funds to other projects.
A compromise method for paying dividends
The stable size method for determining the portion of a firm's net profit that is transferred to investors involves a long-term coefficient that represents the portion that is allocated to dividends.
The main advantage here is the transparency of the formation of this fund, which directly follows from the efficiency of the company's work and can be accurately calculated by each shareholder based on the financial reporting indicators. The disadvantage is the instability of payments, since profit is also an inconsistent result of the enterprise's activities.
Aggressive approach to dividend payments
An aggressive approach involves a constant increase in the size of dividends, and this share is set as a fixed percentage of the value for the previous period. Such a dividend payment policy carries risks for the enterprise, since it reduces its capitalization and financial stability.
But investors are in the black, they receive a stable and constantly growing income. The value of shares of such a company also increases. Aggressive investment policy is acceptable only for enterprises that do not have financial problems and have a significant remaining profit after satisfying all development needs.
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