Dividend Policies Explained: What, Why, and How
As business owners, we all know the thrill of seeing profits stack up in the bank account. But let’s be real—too often, that bank balance gets treated like a personal wallet.
Groceries, birthday gifts, a cheeky new toy, all flowing through the business account. It’s messy, it’s reactive, and most importantly—it’s a dangerous way to run your business.
→ Why Your Business Needs a Dividend Policy
→ What Is a Dividend Policy?
→ Why Discipline Wins Every Time
→Timing: How Often Should You Pay Dividends?
→Quantum: How Much Should You Pay?
→ The Danger Zone: Declaring Dividends You Can’t Afford
→ Discipline: The Real Secret Sauce
→ Where CFO Dynamics Fits In
→ Final Thought
Why Your Business Needs a Dividend Policy (and How to Make It Work for You)
Here’s the uncomfortable truth I noticed very early in my career: the most successful business owners were always the most disciplined. They didn’t treat their business like a piggy bank. They paid themselves a proper commercial wage, they set aside money for tax, and they rewarded themselves through a structured dividend policy.
So, what exactly is a dividend policy? Why should you care? And how can you use it to not only put money in your pocket but also protect and grow your business? Let’s break it down.
What Is a Dividend Policy?
At its simplest, a dividend policy is a clear set of rules for how and when profits are distributed to owners or shareholders. It sets the rhythm:
- When you get paid
- How much you get paid
- How the business balances reward for owners with reinvestment for growth
Think of it as moving from “ad hoc withdrawals whenever you need a cash top-up” to a commercial system that rewards owners fairly, keeps the business healthy, and avoids nasty surprises.
In Australia especially, dividend policies are becoming increasingly important. The ATO has tightened up on murky arrangements, ownership groups are getting broader, and the days of running personal expenses through the business are long gone. A proper dividend policy isn’t just neat housekeeping—it’s a necessity.
Why Discipline Wins Every Time
In my early accounting days, I saw a pattern: businesses where owners dipped in and out of the account like it was their personal savings account tended to struggle. Businesses where owners separated their finances, paid themselves wages, and distributed profits with discipline thrived.
It wasn’t about who had the best product or the flashiest marketing—it was about discipline. The discipline to keep business and personal finances separate. The discipline to plan ahead. The discipline to only take money out on a structured basis.
And the best tool for enforcing that discipline? A dividend policy.
Timing: How Often Should You Pay Dividends?
Let’s start with the “when.”
For private businesses, I recommend quarterly or six-monthly dividends. Why?
- A quarter is long enough to see a true reflection of business performance (no hiding behind one lucky or unlucky month).
- Six months lines up with what many listed companies do—an interim and a final dividend.
- A year? Too long. Owners lose motivation.
- Monthly? Too volatile. You’ll overreact to short-term highs and lows.
The sweet spot: quarterly or half-yearly. Enough frequency to keep motivation up, without creating chaos.
Quantum: How Much Should You Pay?
This is the golden question.
A good rule of thumb is to link dividends to a percentage of earnings. Say you earn $100,000 in the quarter. You set your policy to pay 40% of earnings. The dividend is $40,000—simple. That amount is then split among owners according to their shareholding.
But what’s the right percentage? It depends:
- Mature businesses with steady cash flows: 20–40% of earnings works well. This is in line with many listed companies.
- High-growth businesses: You may want to retain more profits in the business to reinvest. Think of Warren Buffett’s Berkshire Hathaway, which has never paid a dividend. Or Amazon, which reinvested every cent for decades.
- Businesses with big working capital needs (manufacturing, construction, distribution): You’ll likely need to keep more cash inside the business to fund stock, work-in-progress, and debt.
- Service businesses with steady debtor collections: Often easier to pay higher dividends, since the cash flow is smoother.
And don’t forget debt. Sometimes, paying down debt gives you a better return than pulling money out. There’s no one-size-fits-all answer—but there is a right answer for your business.
The Danger Zone: Declaring Dividends You Can’t Afford
Here’s a nightmare scenario: you declare a dividend, you celebrate, you even spend the money—and then you realise the business actually can’t afford it. Now you’re either dipping into overdraft or, worse, asking owners to inject money back in. That’s a confidence killer for everyone involved.
This is why financial planning with a CFO is so important. You should be able to project 6–12 months ahead and reverse engineer what dividends can realistically be paid. You cover your stock, your tax, your operational obligations—and then you pay what’s left.
Discipline: The Real Secret Sauce
Even the best dividend policy is worthless if you don’t stick to it. That means two layers of discipline:
-
Review it regularly. Every 6–12 months, check that your policy still fits your business goals and shareholder vision. Businesses evolve. Your dividend strategy should too.
-
Pay it—no excuses. Whether it’s $50 or $5 million, if the calculation says it’s owed, it gets paid.
I had a client once who received his first dividend payout and said, “I don’t need this money.” My response? “That doesn’t matter. You’ve earned it. The calculation was clear. Take it.”
If Bill Gates and Steve Ballmer can pocket billion-dollar dividends from Microsoft (money they’ll never need), you can take the discipline to pay yourself the $20,000 or $200,000 your policy dictates.
Where CFO Dynamics Fits In
This is where an outsourced CFO makes the difference between chaos and clarity. At CFO Dynamics, we help clients:
- Design smart dividend policies tailored to their business model, tax structure, and growth ambitions.
- Model cash flow and working capital so you know what’s safe to pull out and what should stay in the business.
- Balance owner reward and business health—keeping shareholders happy without starving the business of fuel.
- Bring discipline and accountability to ensure that if a dividend is declared, it’s properly executed, every single time.
The result? Owners get rewarded consistently, businesses stay financially strong, and there are no nasty surprises.
Final Thought
A dividend policy might not sound like the most thrilling part of business ownership—but trust me, when you see disciplined, predictable dividends land in your personal account, it feels a lot more exciting than dipping into the company account for groceries.
It’s about maturity. It’s about discipline. And most importantly, it’s about aligning owner reward with business growth.
If you haven’t got a dividend policy in place, now’s the time to get one. It’s one of those small shifts that creates massive long-term impact.
Subscribe to our newsletter
For more tips on increasing revenue and profitability, sign up to our newsletter for business owners, leaders, and finance team managers. Each week, you'll get practical, no-fluff tips and insights in short, easy videos. No corporate jargon, no time wasting. Sign up now.
