Explain how dividend policy may be achieved?

The decision of dividend is made by the board of directors. The chronology of dividend is as follows.1. Declaration date : the board of directors passes a resolution to pay dividends.2. Ex-dividend date : The stockholders who trade before this date are entitled to receive the dividend. On the date of ex-dividend, the stock price goes down by the amount paid out in cash for the dividend on the assumption of perfect market.3. Date of record : The corporation prepare the list of believed shareholders as of this date.4. Day of payment : The dividend checks are sent to shareholders.Figure 1.If investors who want to get a dividend must buy or hold by the day before ex-dividend date.For a company considering dividends, there are three methods to take.First. Residual Method.The fund for dividend rely on internally generated equity to finance new projects. So, dividend can be paid out only when there is residual or leftover after all positive NPV project capital project requirement are met. In this case, dividends can vary on a year-on-year basis.Second, Stability Method.With the stability policy, companies may choose a cyclical policy that sets dividends at a fixed fraction of quarterly earnings or yearly earnings. By using this method, the firm can give a certainty to investors.Third, Hybrid Method.This method is mixed one of residual method and stability method. The firm set dividend based on yearly profits and set extra dividend only if there is income exceed targeted levels. This way is generally used in today’s market.




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