State any four factors that affect the dividend decision of an enterprise.

Factors affecting dividend decision are:

(i) Earnings: Earnings are a major determinant of dividend decision as dividends are paid out of current and past earnings.

(ii) Stability of earnings: It is another factor affecting dividend decision as a company having stable earnings is in a position to declare higher dividends.

(iii) Stability of dividends: Companies generally prefer to maintain stability of dividends while taking dividend decision.

(iv) Growth opportunities: If a company has good growth opportunities, it pays out fewer dividends.

(v) Cash flow position: A good cash flow position is necessary for declaration of dividend.

(vi) Shareholders’ preference: It is kept in mind by the management before declaring dividends.

(vii) Taxation policy: It affects the dividend decision as a higher dividend distribution tax will lead to lesser dividend payout.

(viii) Stock market reaction: The possible stock market reaction on the share price to dividend policy is one of the important factors affecting dividend decision.

(ix) Access to capital market: While taking dividend decision, companies take into consideration their access to capital market.

(x) Legal constraints: Certain provision of the Companies Act i.e., legal constraints place restrictions on payout of dividend.

(xi) Contractual constraints: While taking dividend decision, companies keep in mind the restrictions imposed by the lenders i.e., contractual constraints.

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