Shareholders of companies are paid dividends in cash distributions monthly, quarterly, or yearly. Dividends are paid on the basis of per-share owned by shareholders. This considers pricing dividends as fractional shares or fixed dollar payment per share owned as per the dividend policy. Dividend policy involves guidelines that any company that wishes to determine the earnings to pay out to its shareholders will use to make such a determination. It is essential that investors get to understand about dividend policy since the significant cash outflow of the companies is the dividends. The management uses dividend policy in decision making, and therefore shareholders need to understand to what extent is the policy applied when issuing dividends to avoid misappropriation.

It is sometimes normal for firms to change the dividend policy. Dividend cut may be one reason why the policy may change when there are signs that the company needs money quickly. Sometime, the management may respond to the needs of the shareholders and may want to increase dividends thus changing the policy. Companies that have never paid anything to shareholders may wish to introduce new dividends by changing the dividend policy. Dividend policy is affected by many factors such as the legal requirement that makes compulsory that companies act in a particular direction concerning dividends. Others include the liquidity position of the firm and the expected rate of return.

The dividend policy may fit the shareholders with goals of wealth maximization if the policy requires that shareholders are paid high dividends when the earnings increase. Dividends are paid to the shareholders as part of the earnings made by the company while interest expense defines the cost that is paid on the dividends that the shareholders receive. They are similar in a way that they affect the wealth level of the investor from the operations of the company.

 
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