Dividends are payments made to stockholders from a firm's earnings, whether those earnings were generated in the current period or in previous periods.
Dividends may affect capital structure.
- Retaining earnings increases common equity relative to debt.
- Financing with retained earnings is chapter than issuing new common equity.
Dividend Policy means once a company makes a profit, management must decide on what to do with those profits. They could continue to retain the profits within the company or they could pay out the profits to the owners of the firm in the form of dividends.
Once the company decides on whether to pay dividends they may establish a somewhat permanent dividend policy which may in turn impact on investors and perceptions of the company in the financial markets. What they decide depends on the situation of the company now and in the future. It also depends on the preferences of investors and potential investors.
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