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Chapter 5

Dividend policy in the real world

3.1 Balancing the theoretical and practical considerations

In the real world managers have to make a judgement on dividend
policy after taking many varying factors into account.

Summary of key considerations:

 The clientele effect – What dividends are the shareholders
expecting?

 The cash needs of the company

 Signalling – What dividend did the company pay last year?

 Legal factors – Is it legal to pay out a dividend?

 Debt covenants – e.g. is there a minimum gearing ratio
imposed on the company, or a maximum dividend pay-out
percentage, as a covenant in a debt agreement?

 Tax implications – What is the tax impact for shareholders of
paying dividends?

 Link to investment and financing – What investment
opportunities does the company face? How difficult/expensive
is it to raise external finance?

 Inflation – what dividend increase is needed to maintain the
purchasing power of last year's dividends?

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