Discuss the factors which a company may need to take into consideration when determining their dividend distribution and identify the three most commonly used dividends distribution policies.

The first 200 words of this essay...

Discuss the factors which a company may need to take into consideration when determining their dividend distribution and identify the three most commonly used dividends distribution policies.

A dividend policy is the plan of action adopted by the directors of a company whenever it is decided whether to distribute a company's profits as payments to individual shareholders. The decision of dividend policy is the responsibility of a company's directors. Under UK company law, directors cannot be forced to recommend a dividend and the shareholders cannot vote themselves a higher dividend than that recommended by the directors, although they may vote for a lower one.

There are a number of factors that may influence a company's decisions regarding dividend distribution. One of these factors is profitability. The 1985 Companies Act prevents distribution of dividends from sources other than distributable profits; therefore, if a company is not profitable then it will not be able to pay dividends. A company with liquidity problems will also have difficulties in sustaining dividend payments.

A company should also take tax issues into consideration when determining its dividend policy. Income from dividends and the capital gains that are realised when shares are sold may attract