1. Earnings : Companies having high and stable earning could declare high rate of dividends as dividends are paid out of current and past earnings.
2. Stability of Dividends : Companies generally follow the policy of stable dividend. The dividend per share is not altered/changed in case earnings
3. Growth Prospects : In case there are growth prospects for the company in the near future them it will retain its earning and thus, no or less dividend will be declared.
4. Cash Flow Positions: Dividends involve an outflow of cash and thus, availability of adequate cash is for most requirement for declaration of dividends.
5. Preference of Shareholders : While deciding about dividend the preference of shareholders is also taken into account. In case shareholders desire for dividend then company may go for declaring the same.
6. Taxation Policy : A company is required to pay tax on dividend declared by it. If tax on dividend is higher, company will prefer to pay less by way of dividends whereas if tax rates are lower then more dividends can be declared by the company.
7. Stock market reaction: Increase in dividend is good news for investors and hence market price of the shares increases in the stock market. Decrease in dividend reduces the market price of share.
8. Legal constraints : Under provisions of Companies Act, all earnings can’t be distributed and the company has to provide for various reserves. This limits the capacity of company to declare dividend.
