Ever wondered why some companies pay out profits to shareholders regularly, while others hold back or change their plans every year? That decision depends on something called the types of dividend policy—a key part of financial management that every investor (and even smart saver) should know about.
In this blog, you’ll learn what dividend policy really means and explore the most common types—like stable, constant, residual, irregular, and hybrid dividend policy. You’ll also get to know why this policy is important, what factors affect it, and even how the Gordon model helps in deciding the right strategy.
Whenever a company earns profit, it has two choices—either keep the money to grow the business or share a part of it with its shareholders. That decision-making process is called dividend policy.
In simple words, dividend policy is a plan that helps a company decide if it should give dividends, how much to give, and when to give them. Some companies pay a fixed amount every year, some pay only when profits are high, and some don’t pay at all. It all depends on their policy.
This policy is important because it shows how the company treats its investors and how it plans to use its profits. A clear policy builds trust and helps investors know what to expect.
Depending on their goals, financial condition, and investor expectations, companies adopt different strategies. Below are the most common types of dividend policy explained in simple terms, with easy-to-follow examples.
A stable dividend policy means the company pays a fixed or steadily increasing dividend every year, even if its profits go up or down. The main goal is to build trust and keep shareholders happy with regular income. This policy is often used by large, well-established companies with consistent earnings.
Such companies avoid reducing dividends because that could send a negative message to investors. Stability in dividends also attracts long-term investors who are looking for steady returns instead of risky ups and downs.
Example: Suppose a company earns ₹10 lakh profit this year and ₹8 lakh next year. With a stable dividend , it may decide to pay ₹2 lakh as dividends every year, regardless of the changes in profit.
In a constant dividend policy, companies pay a fixed percentage of their profits as dividends. So, when profits go up, dividends increase, and when profits go down, dividends decrease. It gives the company flexibility, but the dividend income for shareholders may fluctuate every year.
This policy suits companies that want to keep their payout aligned with actual performance, especially in industries with changing profits. However, it can be risky for investors who depend on steady dividend income.
Example: A company declares it will pay 30% of its yearly profit as a dividend. If the profit is ₹5 lakh, it pays ₹1.5 lakh as dividend. If the profit drops to ₹3 lakh next year, it will pay ₹90,000.
A residual dividend policy means the company pays dividends only after funding its capital needs—like buying equipment, expanding operations, or clearing debts. In simple terms, whatever money is left after all business expenses is given as dividends. This type of policy is common in companies that are still growing and need funds for expansion.
This policy helps companies avoid taking loans for investment, but it makes dividends irregular. Shareholders may not get paid every year, especially when the company is focusing on growth.
Example: If a company earns ₹12 lakh in a year and needs ₹9 lakh for a new factory, the leftover ₹3 lakh will be paid out as dividends.
In a no-dividend policy, the company doesn’t pay any dividends at all. Instead, it reinvests the entire profit back into the business. This is mostly seen in startups or tech companies where growth is more important than paying shareholders in the short term.
These companies believe that by reinvesting profits now, they can grow faster and deliver higher returns in the long run through stock price increases. However, this policy might not be preferred by investors who expect regular income.
Example: A startup makes ₹15 lakh in profit but uses all of it to hire new employees, upgrade technology, and enter new markets—without giving any dividend to shareholders.
The hybrid dividend policy is a mix of stable and residual policies. It combines the best of both worlds—paying a minimum fixed dividend regularly and also offering extra dividends when profits are high. This keeps shareholders satisfied and still gives the company the flexibility to use profits for growth.
Many well-managed companies use this policy to strike a balance between investor expectations and future business needs. It also signals financial stability and good management planning.
Example: A company promises a base dividend of ₹1 lakh every year. If it performs well and earns high profits, it may pay an extra ₹50,000 on top of that.
An irregular dividend policy means there’s no fixed schedule or amount for paying dividends. The company may pay in one year, skip the next, and change the amount each time. It all depends on profit, cash flow, and business needs.
This policy is usually followed by businesses with uncertain income or those in industries affected by seasonal changes or economic shifts. Investors in such companies should not expect regular income and should be ready for surprises.
Example: A company earns ₹7 lakh in one year and pays ₹1 lakh in dividends. Next year, it earns ₹8 lakh but doesn’t pay anything, choosing to invest the whole profit back into the company.
A company’s dividend policies aren’t just about sharing profits—it plays a big role in how the company is seen by investors, how it manages its money, and how it grows in the long run. Let’s break down the importance of dividend policy in simple bullet points for better clarity:
These objectives of dividend policies help ensure that the company’s profit distribution supports both growth and shareholder satisfaction.
There are no separate types of dividend policy in financial management, but the most common types include:
These policies help in making strategic financial decisions that maintain a balance between shareholder satisfaction and business growth. Financial managers analyse profits, future investments, market trends, and company goals to select the best dividend strategy.
There are several internal and external factors affecting dividend policy, and understanding them is key to making smart financial decisions.
While factors like profits, cash flow, and legal rules influence a company’s dividends, the determinants of dividend policies are the deeper, long-term elements that shape how companies form their strategies around distributing profits.
1. Nature of the Business
Some industries naturally generate steady cash flow (like FMCG or utilities), allowing regular dividends. Others, like tech startups, need to reinvest constantly—so they may not pay dividends at all.
2. Growth Opportunities
Companies with high growth potential often follow a low or no dividend rule, preferring to reinvest profits for expansion. On the other hand, mature companies may not need heavy reinvestment and can afford to pay more dividends.
3. Stability of Earnings
Businesses with consistent profits can confidently commit to stable dividend policies, while firms with fluctuating income may keep things flexible or adopt a residual dividend rule.
4. Capital Market Access
If a company can easily raise funds from the market or banks, it might choose to distribute more profits as dividends rather than keeping them in reserve.
5. Cost of External Financing
When borrowing is expensive or hard to get, companies may prefer to retain earnings and reduce dependency on loans—affecting their dividend decisions.
6. Management’s Attitude
Some companies follow a conservative approach, choosing safety and long-term goals, while others may adopt a shareholder-friendly approach with generous dividends to attract investors.
The Gordon Model of Dividend Policy, also known as the Gordon Growth Model, is a popular financial tool that helps investors calculate the value of a company’s stock based on the idea that dividends grow at a constant rate forever. It was developed by economist Myron Gordon.
The Gordon Growth Model says that the value of a stock is equal to the present value of all its future dividends. It assumes:
Where:
Let’s say a company is expected to pay ₹5 as dividend next year, and the dividends are expected to grow at 6% every year. If the investor’s required rate of return is 12%, then:
So, the stock’s value is estimated to be ₹83.33 according to the Gordon model of dividend policy.
The types of dividend policy include stable, constant, residual, hybrid, no dividend, and irregular dividend policies. Each policy serves a different purpose based on the company’s financial condition, business goals, and investor expectations. Understanding which dividend policy fits best helps companies plan for long-term success while keeping shareholders satisfied. Whether it’s ensuring regular income or reinvesting profits for growth, a well-chosen policy supports financial stability and strategic planning.
The four main types of dividend policies are stable, constant, residual, and irregular dividend policies. A stable policy ensures consistent payouts over time, regardless of profit levels. A constant policy distributes a fixed percentage of earnings as dividends each year. The residual policy pays dividends only from leftover profits after all business needs are covered. Lastly, an irregular policy has no fixed rules and dividends are paid based on the company’s performance and available funds.
A hybrid policy combines the features of both stable and residual dividend policies. Companies that follow this approach provide a minimum guaranteed dividend each year (just like in a stable policy), but also pay additional dividends when profits are higher than expected. This strategy allows firms to offer consistent returns to shareholders while keeping the flexibility to reinvest in growth when needed.
The most common type of dividend is the cash dividend, where companies pay a portion of their profit directly to shareholders in the form of cash. It is typically declared at regular intervals—quarterly, half-yearly, or annually—depending on the company’s dividend policy.
The three key theories of dividend policy are the Walter’s Model, Gordon’s Model, and Modigliani and Miller (M&M) Theory. Walter’s and Gordon’s models both suggest that dividend decisions affect a firm’s market value and that investors prefer stable dividends. On the other hand, the M&M theory argues that dividends are irrelevant in determining a company’s value and that investors are more focused on the company’s earnings and investment decisions.
An interim dividend is paid during the financial year, usually after the company’s quarterly or half-yearly results. It is declared before the final accounts are prepared and is typically approved by the board of directors. A final dividend, on the other hand, is declared at the end of the financial year, after the approval of the annual financial statements by shareholders during the annual general meeting (AGM).
Disclaimer: This article is intended for educational purposes only. Please note that the data related to the mentioned companies may change over time. The securities referenced are provided as examples and should not be considered as recommendations.
