The factor affecting the decision that determines the amount of profit earned to be distributed and to be retained in the business, i.e. dividend decision are:
(i) Amount of earnings: As a firm pays dividends out of its own earnings (either current or past), it can be said that companies with higher earnings are in a position to pay a higher amount of dividend to its shareholders and vice versa.
(ii) Stable earnings : A company with stable and smooth earnings is in a position to distribute higher dividend as compared to those that have an unstable earning.
(iii) Stable dividends : In general, companies try to avoid frequent fluctuations in dividend per share and opt for increasing (or decreasing) their value only when there is a consistent rise (or fall) in the earnings of the company.
(iv) Growth opportunities: Companies aiming for a higher growth level or expansion of operations retain a higher portion of the earnings with themselves for re-investment, thereby distributing lesser dividends.
(v) Cash flow position: As dividend payments involve cash outflow from the company companies low on cash/low on liquidity distribute lower dividends than those with high cash and liquility.
(vi) Contractual constraints: Contractual constraints are associated with a business contractual agreements with their lenders for raising funds through debt financing. These lenders restrict businesses to issue a dividend in case there is large amount of outstanding debt.