The Factors that should be considered while determining Long-Term Dividend Policy are as follows:
Financial requirements of the company
If a firm has so many opportunities at its hand then definitely it has to pay low dividends and reinvest profits in the business. If the cost of funds is too high then again the firm shall appropriate a larger amount of profits to retained earnings, since they do not involve any floatation cost and other legal formalities.
As per the Indian Companies Act, a company cannot pay dividends from its paid up capital, and utilize profit for dividend only after making appropriation for depreciation and redemption.
Issue of bonus shares
Sometimes companies instead of paying dividend in cash issue bonus shares (also known as stock dividend). This increases the number of shares with the shareholders as well as the capital base of the company. The issue of bonus shares is an integral part of the dividend policy.
Capital market considerations
When a firm is in need of funds it has two choices – to pay more dividends and raise additional capital from capital market, provided it has easy access to capital market; or pay low dividends to the shareholders and depend upon retained earnings if the company has limited access to capital market.
Stable dividend policy
Most companies, shareholders and even institutional shareholders like LIC, mutual funds, UTI, et al prefer to invest in companies that follow a stable dividend policy because: this has a positive impact on the market valuation, keeps uncertainty away from investors’ minds, and the need for current income is fulfilled.