There are four major dividend policies that can be followed by a firm. These are:
a) Constant amount of dividend per share
Under this policy a company will pay a fixed amount per annum per share regardless of the fluctuations in its profits. Dividends are increased only after an increase in earnings appear clearly sustainable and relatively permanent.
b)Constant payout ratio
Under this policy, the firm will pay a fixed dividend rate (e.g. 10% of earnings). The dividend per share would therefore fluctuate as the earnings per share changes.
c)Residual dividend policy
Under this policy dividend is paid out of earnings left over after investment decisions have been financed. Dividend will only be paid if there are no profitable investment opportunities available. This policy is consistent with shareholders wealth maximization objective.
d)Constant dividend per share plus extras
This is a compromise between the two policies discussed above. It gives the firm flexibility to increase dividend during years of high earnings. The extra dividend is given to the shareholders in such a way that they don't perceive it as a commitment on the part of the company to continue this extra dividend in the future.