14

My understanding of dividends is that the company pays each shareholder a fixed amount of money per share they own. I can see how this would work if the company is in profit, because the company can just say that they will use x % of its profits to cover the dividends.

However, what if the company is not in profit? Is it usual for the company to continue paying dividends even though this means they will be going even further into debt? Or do companies usually stop paying dividends at this point?

  • 2
    Not being "Profitable" and going "further into debt" are not the same thing. A company may be unprofitable now, losing money every quarter, but still have no debt at all. This typically happens in declining industries, where the company made lots of money years ago, still has a large cash supply, but is no longer profitable on a day-to-day basis. They may decide that paying dividends is a better choice than investing in a declining business. – abelenky Aug 31 '17 at 19:15
  • Dividends are not legally fixed (mandatory payments are interest instead), but some companies and industries have a history and reputation of paying a steady dividend and their stock price is supported by that reputation so management will stretch to keep the dividend up even if there are hopefully-temporary shortfalls in profit. – dave_thompson_085 Sep 8 '17 at 19:57
16

Yes the company can still pay dividends even if they aren't making a profit.

1) If the firm has been around, it might have made profits in the past years, which it might be still carrying (check for retained earnings in the financial statements).

2) Some firms in the past have had taken up debt to return the money to shareholders as dividends.

3) It might sell a part of it's assets and return the gain as dividends.

4) They might be bought by some other firm, which returns cash to shareholders to keep them happy.

It pays to keep an eye on the financial statements of the company to check how much liquid money they might be carrying around to pay shareholders as dividends.

They can stop paying dividends whenever they want. Apple didn't pay a dividend while Steve Jobs was around, even though they were making billions in profits. Many companies don't pay dividends because they find it more beneficial to continue investing in their business rather than returning money to shareholders.

  • 1
    Note that 3 in particular is a real possibility. Sell off a division that's losing money, both to stop the loss and to get some cash instead, and then return the cash to the shareholders. – MSalters Aug 20 '15 at 16:01
  • @MSalters is that this: investopedia.com/terms/l/liquidatingdividend.asp – coburne Aug 20 '15 at 17:20
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    @coburne: No, that's a variant of case 4. – MSalters Aug 21 '15 at 7:51
  • For US income tax distributions exceeding profit are classified as 'return of capital' instead of 'dividend' and are not taxed currently as income but instead subtracted from basis (increasing your future-taxable capital gain, unless you die without selling) unless/until basis is zero (then taxed currently as capital gain). – dave_thompson_085 Sep 8 '17 at 19:57

protected by Chris W. Rea Sep 7 '17 at 3:10

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