24. Dividend Policy decides what proportion of the profits to pay out as dividends.
Which of the following is the best policy?

(i) Pay out all profits as dividends
(ii) Pay out no profit as dividend, but use all the profit to expand the company
(iii) Pay out the same £ value as dividends every year

A. (i) is the best, as it rewards shareholders for their investment.

B. Something between (i) and (ii) is the best, as it allows shareholders to receive some dividend and the company to retain earnings to grow. (ii) is unfair to the shareholder.

C. (iii) is best, as it allows shareholders to plan for the dividend received.

D. None of them are “best”. It depends upon what shareholders prefer.

Answer : D

Most companies do something between (i) and (ii).Note that (ii) does not penalise the shareholder; if the company is expanding and growing then the value of the share will increase. However, dividends and capital gains from the sale of shares have different tax implications – and once a share is sold, no future dividends will be received.
Shareholders may prefer to know they will receive a given percentage, or may prefer a specific value – especially if it does form part of their income.