Disadvantages Of Zero Dividend Policy

Dividend policy is the set of rules a company uses to decide how much of its earnings it will pay out to their shareholders (Aggarwal, 2013). When a company earns profit, management can do one of two things with those profits. It can either choose to retain them - essentially reinvesting them into the company with the hope of creating more profits and thus extra stock appreciation or to distribute a share of the profit after taxation to its shareholders in the form of dividends.

Cash dividend is the money paid to shareholders out of the company’s accumulated profits. Usually, the board of directors determines if a dividend is desirable for their particular company based upon various financial and economic factors. Dividends are usually paid

Fixed percentage ratio is when the company pays out a fixed percentage of annual profits as dividends. The advantage of this policy from the company’s point of view is that it is relatively easy to operate and also this sends a clear signal to investors about the level of the company’s performance. The disadvantage however for the company is that it imposes a constraint on the amount of funds it is able to retain for reinvestment.

Next just like the name itself zero dividend policy is when a company decides to pay no dividend at all. Such a policy is easy to operate and will not incur the administration costs associated with paying dividends. A zero dividend policy is often adopted by new companies which require large amounts of reinvestment in the first few years of their existence.

Finally a company may choose to pay a steadily increasing dividend in either money terms or in real terms. A constant or increasing dividend in money terms may result in a declining or increasing dividend in real terms, depending on the level of

Current dividends, on this analysis, represent a more reliable return than future capital gains. If dividends are preferred to capital gains by investors, dividend policy has a vital role to play in determining the market value of a company. Companies that pay out low dividends may experience a fall in share price as investors exchange their shares for those of a different company with a more generous dividend policy. As so it is possible to criticise a number of the assumptions made in (Modigliani, 1961) as being