# Determinants of Dividend Decisions
Several factors influence how much a company decides to pay out as dividend.
| Factor | Explanation |
|---|---|
| Availability of Funds | If the company needs funds, it may retain earnings to save flotation costs and avoid dilution of control from issuing new equity. |
| Cost of Capital | If financing is through debt (a cheaper source), higher dividends can be distributed. If financing would require issuing new equity, it is better to retain earnings. |
| Capital Structure | The company must maintain an optimal Debt–Equity ratio while deciding dividend payments. |
| Stock Price | Generally, higher dividends raise the market price of shares; lower dividends may depress it. |
| Investment Opportunities | With profitable opportunities available, the firm may retain more earnings rather than pay dividends. |
| Industry Trends | Some industries are known for regular dividends; firms in them must pay to maintain investor confidence and market stability. |
| Shareholder Expectations | Shareholders may be income-seeking (prefer regular dividends) or growth-oriented (prefer retained earnings for growth). |
| Legal Constraints | Governed by Section 123 of the Companies Act, 2013 — see bare act below. |
| Taxation | Before 1 April 2020: companies paid Dividend Distribution Tax (DDT) and dividends were tax-free for shareholders under Section 10(34). After 1 April 2020: DDT was abolished and dividends are now taxable in the hands of investors as 'Other Income' at their applicable slab rate. |
## Legal Sources of Dividend (Section 123, Companies Act 2013)
Dividends can be declared only out of:
1. Current year's profits (after providing for depreciation);
2. Undistributed profits of previous years (after depreciation);
3. Both current and past profits; or
4. Money provided by the Central/State Government (where applicable).
Unrealized gains and revaluation profits cannot be used for dividend payment.