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How Do I Write a Dividend Policy?

Geri Terzo
Geri Terzo

It is the goal of any business to attain and grow profitability. Companies that list shares publicly in the financial markets have choices in what to do with that income. The money can be used to reinvest in the business, or it can be distributed to shareholders in the form of dividends. A dividend policy outlines the expectations for such payouts, including how much, how often, and what type of distributions will be made.

In writing a dividend policy, remain mindful that some investors buy equity in a company based on the perception created from those procedures. Dividend stocks provide a revenue stream to investors, much like a conservative bond security, on top of any profits earned in the value of the stock. If you establish a dividend policy and expect that there may be future changes along the way, manage those expectations in the dividend framework so that investors know what to expect. Provide a historical context for stock price performance and profitability so that support for future profitability is justified to investors within the confines of the policy.

Man climbing a rope
Man climbing a rope

You must have an expectation and forecast for sales, net income, and other future earnings growth in order to establish a dividend policy. This is because future distributions to shareholders are dependent on continued profitability and growth. If, in the near future, an acquisition of some type is anticipated, this could interfere with a company's plans to pay dividends, and those payouts can be interrupted or canceled altogether. Also, if you know of future acquisition plans presently, it would be deceiving to investors not to mention this possibility in the policy.

The frequency with which you intend to pay investors dividends should also be outlined in a dividend policy. Most of these distributions are made quarterly, but they could be limited to yearly payouts as well. Also, distributions can be made in cash or via additional stock to investors. A dividend policy should clearly state the anticipated method of payouts.

Understand that a corporate board of directors must support a dividend payout before distributions are made. In writing the policy, consider that you will need to win board approval in order to raise the value of a dividend if profits exceed expectations in the future. Also, investors may become disenchanted in response to lowered dividends, so keep the policy flexible and realistic enough to avoid disappointment.

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