Which factor affecting dividend decision rests on the idea that dividends are paid out of current and past earnings?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Amount of earnings
Option (1) Stability of earnings — Incorrect. This factor is about how steady the earnings are. A company with stable earnings can declare higher dividends, while one with unstable earnings is likely to pay smaller ones.
Option (2) Amount of earnings — Correct. A company can pay dividends only out of the profit it has earned this year and in past years. So the size of its earnings is a major factor in the dividend decision.
Option (3) Stability of dividends — Incorrect. This is the policy of keeping the dividend per share steady. The dividend is raised only when the company is sure its earning power has gone up for good. It rests on keeping the payout steady.
Option (4) Cash flow position — Incorrect. Paying a dividend is an outflow of cash. A company may earn a profit and still be short of cash, so it needs enough cash in hand to declare a dividend. It rests on cash in hand.
NCERT (2026-27 Edition): “Factors Affecting Dividend Decision … (a) Amount of Earnings: Dividends are paid out of current and past earning. Therefore, earnings is a major determinant of the decision about dividend. “(e) Cash Flow Position: The payment of dividend involves an outflow of cash. A company may be earning profit but may be short on cash. Availability of enough cash in the company is necessary for declaration of dividend.” |