Page 2 - Lesson Note 3
P. 2
(a) Amount of Earnings:
Dividends are paid out of current and past earning. Therefore,
earnings are a major determinant of the decision about dividend.
If there are more earnings then company declares high rate of
dividend whereas during low earning period the rate of dividend
is also low.
(b) Stability Earnings:
Other things remaining the same, a company having stable
earning is in a better position to declare higher dividends. As
against this, a company having unstable earnings is likely to pay
smaller dividend.
(c) Stability of Dividends:
Companies generally, follow a policy of stabilising dividend per
share. The increase in dividends is generally made when there is
confidence that their earning potential has gone up and not just
the earnings of the current year. In other words, dividend per
share is not altered if the change in earnings is small or seen to be
temporary in nature.
(d) Growth Opportunities:
Companies having good growth opportunities retain more money
out of their earnings so as to finance the required investment. The
dividend in growth companies is, therefore, smaller, than that in
the non–growth companies.
(e) Cash Flow Position:
