Meaning and illustration of Dividend

Dividend is the portion of net profit if financial statement shows net profit, the Board of director (BOD) declare dividend to share holder. The payment of corporate dividend is at the discretion of BOD. Dividend may be paid in cash and Stock. The claims of all creditors, the government and preferred stock holders must satisfy. Dividend policy determines the division of earnings between payments to stockholders and reinvestment in the firm (Weston, Copeland and Shatri: 2004). Dividend policy is a major decision of firm a firm's dividends into two parts: the retained earnings and dividends.

The retained earning means to provide funds to the firm for long term growth from its net earnings. Retained earnings are most significant internal sources of financing the growth of firm. On the other hand, dividends are desirable from shareholder point of view as it tends to increase their current wealth. Dividends constitute the use of the firm's funds. Thus, the two objective of dividend policy distribution of dividend and retained of earning for growth, through desirable, are in conflict. There is reciprocal relationship between retained earnings and cash dividends. A higher dividend rate means less retained earning lesser dividend rate means high retained earnings. If retained earnings is less the growth will be slower and lower market price per share. So, the financial manager must very carefully decide the allocation of earning between dividends and retained earnings, as their decision affects the value of firm and as a result, the value of firms cost of capital.

Dividend policy and stock price has always correlation; if the company pays high dividend the stock price increase and vice-versa. But in some cases out of their inter relation. The price may remain constant or decrease low.

The main Focus of the study is dividend policy practice in Nepalese commercial Bank. But different other studies are going to be done  for these purposes, i.e. comparison of EPS, DPS, and MPS and other relevant studies as for requirement. Someone says dividend payment has no impact on valuation and someone says to be active variable for valuation of stock price.