Dividend Policy Ratios
Dividend policy ratios measure how much a company pays out in dividends relative to its earnings and market value of its shares. These ratios provide insights into the dividend policy of a company. They compare the dividends to the earnings to measure how much of its earnings a company is paying out in dividends. They also compare the dividends to share prices to see how much cash flow the investors get for their investments in the company’s shares.
Dividend payout ratio and dividend yield are two most common examples of dividend policy ratios. Dividend cover is another example of such ratios. Dividend payout ratio gives an idea how well the earnings support the dividends paid out. Dividend yield measures how much a company pays out in dividends relative to the market value of its shares.
Generally speaking, the investors usually look for high dividend policy ratios therefore the companies should manage their dividend policies carefully. Companies need to manage their dividend policy ratios carefully to maximize the shareholder value. Market value of shares is greatly affected by the dividend policy ratios. Poor dividend policy ratios can result in fall of market value of shares and thus loss of shareholder value. On the other hand good dividend policy ratios can increase the prices of shares and shareholder value.
Dividend policy ratios are affected by the age of a company. Companies which are mature, stable and large in size usually pay higher dividends. Therefore dividend policy ratios of such companies are usually high. On the other hand, companies which are young, small and seeking growth usually do not pay any dividends or pay very modest dividends. Therefore dividend policy ratios of such companies are not so handsome.
It should be noted that high dividend policy ratios may not always be a good thing to seek. The earnings which are not paid out in dividends are reinvested for future growth of the company and its earnings. High dividend policy ratios may mean that the company does not have sufficient funds to invest in new projects for expansion and growth. The dividend policy ratio should try to achieve balance between short term cash flows to shareholders and future growth of the company and its earnings.