Dividend policy is to achieve a balance between current dividends and growth in the future and maximize the company’s stock price.

In this section we look at three theories about the preferences of investors:

• Dividend irrelevance theory, Merton M. and Franco Modiglian believes that the company is only determined by the basic ability to generate profits and business risks. In other words that the value of a company will depend only on income produced by assets-assets, rather than on share of profits will be divided into dividends to retained earnings.
• The theory of the bird in the hand, a theory which states that the value of a company will be maximized by setting a high dividend payout ratio.
• The theory of tax preferences, when viewed from the standpoint of tax, investors would generally prefer lower dividend payments than receive a higher payment, it is influenced by several factors, namely:

1. Long-term capital gains subject to tax rates of 20%, while the dividend income subject to the effective rate can reach 38.6% maximum rate. Investors who receive most dividends choose to hold or reinvest its profits in the business, so that profit growth will likely lead to rising stock prices, and consequently lower capital gains tax would replace the high-tax dividends.
2. The tax on profits will not be paid until the shares are sold. An heir is not taxed on capital gains.
3. Because of these advantages investors generally prefer the company holding the majority of their profits.