tutor2u | Corporate dividends during the economic crisis

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Corporate dividends during the economic crisis

Level:
AS, A Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 9 Apr 2020

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

Corporate dividends 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

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