Factors involved in Dividend Policy.

Obviously the actual dividend a company is able to pay each year is limited by the cash available and (by law) by the amount of retained earnings.

However, the dividend policy is what the overall long-term intention of the company is as regards dividends – whether to pay high dividends (and therefore low capital growth in the market values) or whether to pay low dividends (and therefore higher capital growth). (You will have seen the illustration elsewhere in my lectures explaining how the retention policy chosen affects the dividend growth rate and therefore the capital growth).

Most large companies adopt a constant dividend policy in order to avoid the signalling effect. The policy they adopt depends on what type of shareholders they want to attract (the clientele effect).