If a company has a residual dividend policy then it pays whatever cash is left in the business once all expenditure has been taken into account. This means that shareholders receive the sums left after the company has taken the likes of capital expenditure, investment and working capital into account.
This is regarded as the most sustainable and logical dividend policy to have as it means a business only pays out what it can afford each year. Although, it does mean that dividend payments can be volatile depending on the performance of the business and its spending requirements: if it suddenly needs to invest more money then there will be less left for shareholders, or if it underspends then investors will receive more. A residual dividend policy can be regarded as a form of zero-based budgeting for dividends, with the dividend being reviewed each year from a zero base and justified each year regardless of previous payouts. A residual dividend policy provides greater flexibility to companies compared to other policies, as it puts growth needs and investment before distributions. However, it also means dividends will vary each year depending on how the business has performed.