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journal article Why Do Companies Pay Dividends?The American Economic Review Vol. 73, No. 1 (Mar., 1983) , pp. 17-30 (14 pages) Published By: American Economic Association https://www.jstor.org/stable/1803923 Read and download Log in through your school or library Alternate access options For independent researchers Subscribe to JPASS Unlimited reading + 10 downloads Purchase article $10.00 - Download now and later Journal Information The American Economic Review is a general-interest economics journal. Established in 1911, the AER is among the nation's oldest and most respected scholarly journals in the economics profession and is celebrating over 100 years of publishing. The journal publishes 11 issues containing articles on a broad range of topics. Publisher Information Once composed primarily of college and university professors in economics, the American Economic Association (AEA) now attracts 20,000+ members from academe, business, government, and consulting groups within diverse disciplines from multi-cultural backgrounds. All are professionals or graduate-level students dedicated to economics research and teaching. Rights & Usage This item is part of a JSTOR Collection. What Are 4 Reasons a Company Might Suspend Its Dividend?Dividend-bearing stocks are popular among a wide variety of investors, so when a company decides to suspend its dividend payments, it can be a signal to sell for many shareholders. Of course, those who own a stock primarily for the benefit of annual dividend payments are most likely to abandon ship. However, even investors who employ a buy-and-hold strategy may turn tail and run if a company that traditionally pays consistent dividends unexpectedly declares a suspension. While a company suspending its dividends can be a sign of a struggling enterprise, not all dividend suspensions foreshadow corporate failure. Key Takeaways
Understanding 4 Reasons a Company Might Suspend Its DividendReason 1: Financial TroubleThe chief cause of a dividend suspension is the issuing company is under financial strain. Because dividends are issued to shareholders out of a company's retained earnings, a struggling company may choose to suspend dividend payments to safeguard its financial reserves for future expenses. If revenue is down or costs are up, the amount of money left over for dividends at the end of the year may be minimal or nonexistent. Sometimes, dividend suspensions may be announced out of necessity, meaning there is no profit to distribute, or out of proactive financial planning, meaning profit margins are not large enough to warrant any nonessential spending. Reason 2: Unexpected ExpensesAnother reason a company may suspend its dividends is due to unexpected one-time expenses that temporarily reduce profits. Even if revenues remain constant year to year, a lawsuit judgment against the company or the need to replace or update costly equipment may require the company to use its earnings for other purposes. In these scenarios, dividends are generally reinstated as soon as the unexpected expense is satisfied. Shareholders that jump ship at the first sign of trouble may be sacrificing future dividends and capital gains because they failed to research the cause behind the suspension. Not all dividend suspensions are cause for shareholder panic. Reason 3: Funding GrowthDividends are issued out of a company's retained earnings, which represents the total amount of profit accumulated over time that has not been previously distributed as dividends in prior years or otherwise used up. Outside of dividend payments, one of the primary uses for retained earnings is to fund growth projects that, while temporarily costly, promise to provide increased income in the future. If a company decides the time is right to open a new location, expand its product line, or reach out to a new market segment, it may dip into its retained earnings to fund the growth. In this case, dividends may be suspended temporarily to facilitate increased earnings. Again, shareholders who dump a stock that suspends dividends to fund growth may be missing out on accelerated capital gains and increased dividends in future years. Reason 4: To Defer Preferred DividendsDividend distributions can be a little complicated because there are two types of stock that a company can issue. Most stock is considered common stock, and dividends are issued at the discretion of the issuing entity. However, many companies also issue preferred shares that do not carry the same ownership rights as common stock but do provide a guaranteed dividend amount each year, which is typically higher than the dividend received by common shareholders. To issue dividends to common shareholders, the company must first pay back any dividends due to preferred shareholders. In some cases, a company may have the funds necessary to pay a common dividend but not to pay both preferred and common dividends. In this case, a company may choose to pay preferred dividends but suspend common dividends or decide to suspend all dividends entirely. However, any preferred dividends that are deferred must be paid before any common dividends can be distributed. In this case, common dividends may be suspended indefinitely so the company can afford to pay preferred shareholders. Companies that have to suspend preferred dividends fight an uphill battle against ever-increasing overdue payments in subsequent years, so this is not a popular choice unless the company is in serious trouble. Why would a company choose not to pay dividends?The chief cause of a dividend suspension is the issuing company is under financial strain. Because dividends are issued to shareholders out of a company's retained earnings, a struggling company may choose to suspend dividend payments to safeguard its financial reserves for future expenses.
What companies do not pay dividends?Companies pay dividends to attract investors who want to share in the company's profits.. Amazon (AMZN). AutoZone (AZO). Meta (FB). Alphabet (GOOGL) (GOOG). Biogen (BIIB). Monster Beverage Corp. (MNST). VeriSign, Inc. ... . Waters Corp.. Why would a company cut their dividends?Companies usually make drastic dividend cuts because of financial challenges like declining earnings or mounting debts. Sometimes companies may cut dividend payments for more positive reasons, like preparing for a major acquisition or a stock buyback.
What happens when dividends are not paid?Every director of the company shall be punishable with imprisonment which may extend to two years and with fine which shall not be less than one thousand rupees for every day during which such default continues and the company shall be liable to pay simple interest at the rate of 18% per annum during the period for ...
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