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How do shareholders influence a company's dividend decision?
A company’s dividend policy is influenced significantly by its shareholders’ desire for income. Shareholders usually want regular and increasing income from the companies they invest in. The companies that can pay increasing dividends are considered healthy by the shareholders and if a company shows such quality, the investors would want to invest in them.
Dividend Distribution in Closely-Held and Widely-Held Companies
In case of a closely-held company, the managers and board members of the company know the desire of its shareholders. Therefore, they can devise a dividend policy for the shareholders that meets the needs of their shareholders. These closely-held companies are therefore better in deciding whether to keep funds as retained earnings or to distribute them as dividends.
In case of widely-held companies, however, the base of shareholders is too large. The shareholders are widely dispersed, and their needs and wants are widely distributed. It is quite complex to devise a dividend policy for such large companies. As the managers and board members cannot meet all the shareholders’ needs, they must choose a way that is best suited for the group of shareholders on average.
It is observable that widely-held companies with a complex group of shareholders dispersed widely in the market need a good dividend policy. The board of these companies can create a dividend policy that is somehow common for all shareholders. Moreover, they should create and maintain the rules of dividend payout constant until it interferes with the financial health of the company.
Influence of Minority Shareholders
Small shareholders usually have less number of shares and their investment choices are limited. They sell, purchase, and re-purchase shares depending on their needs and when their budgets allow it. However, the group of such small shareholders can command increasing pressure when the number of such shareholders is significant. The small shareholders want dividends to be part of a flexible income that can be used by them for day-to-day needs.
Wealthy Investors with Large Portfolios
Wealthy investors are concerned with a company’s dividend policy exclusively. They closely follow the trends in shareholding patterns and they may switch their positions when companies do not perform well enough. These investors have a large portfolio and they may seek a certain percentage of income from their investments. Wealthy investors often seek a good amount of dividends.
The desire of the shareholders can command the dividend policies of companies widely. As shareholders demand more profits from their investments, the companies must devise dividend patterns that mostly satisfy the shareholders’ needs. By resorting to a good dividend policy, companies can devise a pattern to satisfy their true owners.
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