Corporate dividends during the economic crisis

In this video we look at the issue of whether big businesses should continue to pay dividends to shareholders during the economic crisis.

A dividend is a payment from the accumulated profits earned by a company to shareholders who qualify for such a payment.

A dividend can only be paid if the company has sufficient reserves of profit.

Quoted public companies usually split the annual dividend into two payments – the "interim" (paid after six months trading) and the "final" (paid at the end of the financial year).

Dividends in the UK

• Dividends are taxed, you can earn up to £2,000 a year in dividends before you are liable to pay tax
• Basic-rate taxpayers pay 7.5% on dividends. Higher-rate taxpayers pay 32.5% on dividends
• Between 2008 and 2018, total dividends paid to UK shareholders grew by 85%
• Total UK dividend payments from FTSE-100 listed companies were worth over £90bn in 2019

Business case for cutting / scrapping dividends

• A way of conserving cash as revenues fall during the crisis
• Cutting dividends might be used top reduce debt levels which helps long term stability
• Retained profits can be a buffer to maintain jobs or perhaps reward workers for helping a business during tough times
• Reduces risk of public backlash if businesses have received state help during the crisis

Risks for businesses from cutting dividends

• Might cause the share price to fall increasing risk of takeover
• Reducing income returns for investors might make it harder to raise new equity in the future
• Lower earnings for employees might impact on motivation

Wider economic impact of cutting dividends

• Dividend payouts are a key source of income for individual savers and investors
• Important income flow for pension funds and insurance companies
• Dividend payments are also a source of tax revenue for the government
• Many businesses operate employee-share schemes – workers might see a reduction in pay
• Charities also rely on dividend pay outs as a source of income to fund their programmes