This document provides an overview of dividend policy and procedures. It begins with learning objectives and an outline. It then defines dividend policy and discusses the different forms it can take, including cash and non-cash dividends. Key dates in the dividend declaration and payment process are examined. The concept of stable dividends that increase with earnings growth is introduced. Finally, stock dividends, stock splits, and stock repurchases are explained as examples of non-cash dividends.

1. Module ACC2007: Corporate
Finance
Topic: Dividend Policy
Sabur Mollah, PhD
Stockholm Business School, Sweden

2. After this lecture, students should be able to:
q Learn the basic concept of dividend policy.
q Figure out the standard cash dividend payment
procedures and critical dates.
q Understand dividend stability.
q Compare between cash dividend and non-
cash dividend (for example, stock dividend,
stock split, and stock repurchase).
8/7/15 Sabur Mollah, Stockholm Business School

3. Outline
● Definition of Dividend Policy and Its forms
● Procedural Aspects of Dividend Policy
● Stability of Dividend Policy
● Important Aspects of Non-cash Dividend
Sabur Mollah, Stockholm Business School8/7/15

4. What is Dividend Policy?
● Dividend policy is the decision to pay or not to pay.
● “ Dividend policy determines the division of earnings
between payments to shareholders and retained
earnings”. - Weston and Bringham
Sabur Mollah, Stockholm Business School8/7/15

5. Dividend Policies involve the decisions,
whether-
– To retain earnings for capital investment and other
purposes; or
– To distribute earnings in the form of dividend among
shareholders; or
– To retain some earnings and to distribute remaining
earnings to shareholders.
What Decision Involves in Dividend Policy?
Sabur Mollah, Stockholm Business School8/7/15

6. Forms of Dividend
Cash
Distribu,ons
Regular
Cash
Dividend
Extra
Dividend/Special
Dividend
Liquida,ng
Dividend
Noncash
Distribu,ons
Stock
Dividend
Stock
Split
Stock
Repurchase
Dividend
Reinvestment
Plan
Sabur Mollah, Stockholm Business School8/7/15

7. Administrative Considerations:
Procedural Aspects
Declaration Date – The date that the board of directors announces the
amount and date of the next dividend.
Payment Date – The date when the corporation actually pays the
declared dividend.
May
8
May
29
May
31
June
15
Sabur Mollah, Stockholm Business School8/7/15
Example: The board of directors met on May 8th to declare a dividend payable
to shareholders on June 15th to the shareholders of record on May 31st.

8. Administrative Considerations:
Procedural Aspects
Record Date – The date, set by the board of
directors when a dividend is declared, on which an
investor must be a shareholder of record to be
entitled to the upcoming dividend.
May
8
May
29
May
31
June
15
Sabur Mollah, Stockholm Business School8/7/15

9. Administrative Considerations:
Procedural Aspects
Ex-dividend Date – The first date on which a stock
purchaser is no longer entitled to the recently
declared dividend.
The buyer and seller of the shares have several days to
settle (T+2). The brokerage industry has a rule that new
shareholders are entitled to dividends only if they purchase
the stock at least two business days prior to the record date.
May
8
May
29
May
31
June
15
Sabur Mollah, Stockholm Business School8/7/15

10. Dividend Stability
Dividends
begin
at
50%
of
earnings,
but
are
stable
and
increase
only
when
supported
by
growth
in
earnings.
Dollars
Per
Share
3
4
2
1
Earnings
per
share
Dividends
per
share
Time
50%
dividend-­‐payout
rate
with
stability
Sabur Mollah, Stockholm Business School8/7/15

11. Stock Dividends and Stock Splits
Stock
Dividend
–
A
payment
of
addi,onal
shares
of
stock
to
shareholders.
OVen
used
in
place
of
or
in
addi,on
to
a
cash
dividend.
Sabur Mollah, Stockholm Business School8/7/15
Example
-­‐
National plc has 400,000 shares of £5 par
common stock outstanding. The company has £7 Million
retained earnings. The pre-dividend market value per
share is £40. The company decides to pay a 5% stock
dividend.

12. Stock Dividends and Stock Splits
Stock
Split
–
An
increase
in
the
number
of
shares
outstanding
by
reducing
the
par
value
of
the
stock.
Sabur Mollah, Stockholm Business School8/7/15
Example
–
Assume Business Machine plc with
1,000,000 shares of £4 par common stock splits
2-for-1.

13. Stock Repurchase
8/7/15
Stock
Repurchase
–
The
purchase
of
its
own
stock.
It
is
also
known
as
buyback.
Sabur Mollah, Stockholm Business School
Example
–
Levy
plc
has
made
a
profit
aVer
tax
as
£800,000 this year. The company decides to
share
repurchase
with
half
of
its
profit.
Current
earnings are £2 per share, and the equity
currently sells for £31 per share. There are
400,000 shares outstanding.

14. Reading List
● Hillier, D., Clacher, I., Ross, S., Westerfield, R., and
Jordan, B. (2011). Fundamentals of Corporate Finance.
McGraw-Hill Education European Edition.
8/7/15 Sabur Mollah, Stockholm Business School