1. Legal rules
a) Net purchase rule
States that dividend may be paid from company’s profit either past or present.
b) Capital impairment rule: prohibits payment of dividends from capital i.e. from sale of ssets. This is liquidating the firm.
c) Insolvency rule: prohibits payment of dividend when company is insolvent. Insolvent company is one where assets are less than liabilities. Insolvent company is one where assets are less than liabilities. In such a case all earnings and assets of company belong to debt holders and no dividends is paid.
2. Profitability and liquidity
A company’s capacity to pay dividend will be determined primarily by its ability to generate adequate and stable profits and cash flow.
If the company has liquidity problem, it may be unable to pay cash dividend and result to paying stock dividend.
3. Taxation position of shareholders
Dividend payment is influenced by tax regime of a country e.g in Kenya cash dividend are taxable at source, while capital are tax exempt.
The effect of tax differential is to discourage shareholders from wanting high dividends. (This is explained by tax differential theory).
4. Investment opportunity
Lack of appropriate investment opportunities i.e. those with positive returns (N.P.V.), may encourage a firm to increase itsdividend distribution. If a firm has many investment opportunities, it will pay low dividends and have high retention.
5. Capital Structure
A company’s management may wish to achieve or restore an optimal capital structure i.e. if they consider gearing to be too high, they may pay low dividends and allow reserves to accumulate until a more optimal/appropriate capital structure is restored/achieved.
6. Industrial Practice
Companies will be resistant to deviation from accepted dividend or payment norms within the industry.
7. Growth Stage
Dividend policy is likely to be influenced by firm’s growth stage e.g a young rapidly growing firm is likely to have high demand for development finance and therefore may pay low dividend or a defer dividend payment until company reaches maturity. It will retain high amount.
8. Ownership Structure
A dividend policy may be driven by Time Ownership Structure e.g in small firms where owners and managers are same, dividend payout are usually low.
However in a large quoted public company dividend payout are significant because the owners are not the managers. However, the values and preferences of small group of owner managers would exert more direct influence on dividend policy.
9. Shareholders expectation
Shareholder clientele that have become accustomed to receiving stable and increasing div. Will expect a similar pattern to continue in the future.
Any sudden reduction or reversal of such a policy is likely to dissatisfy the shareholders and may result in a fail in share prices.
10. Access to capital markets
Large, well established firms have access to capital markets hence can get funds easily
They pay high dividends thus, unlike small firms which pay low dividends (high retention) due to limited borrowing capacity.
11. Contractual obligations on debt covenants
They limit the flexibility and amount of dividends to pay e.g. no payment of dividends from retained earnings.