What is the purpose of a dividend policy and what 3 factors influence the direction of a dividend policy?

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The purpose of a dividend policy is to provide guidance to management, investors and other stakeholders regarding the company’s plans for distributing profits in the form of dividends. A company’s dividend policy can have major implications on long-term shareholder returns. Therefore, it is crucial that they carefully evaluate their strategy. There are three factors that could influence the direction and content of a dividend strategy:
1) Profitability – The ability or willingness of a company to pay out dividends will depend on its profit levels. A company that does not make enough profits may have to keep more of its earnings to finance operations or investments, rather than pay dividends.
2) Cash Flow – Companies may also consider their cash flow when determining how much they are willing or able to distribute as dividends. Cash flow may be low because of excessive spending, debt obligations or other reasons. Companies might need to wait until liquidity is restored before issuing dividends.
3) Investor Expectations – Shareholders often have certain expectations regarding dividend payments from the companies they invest in. These expectations will be balanced with financial realities by management to maintain investor trust and loyalty.

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