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Corporate dividends during the economic crisis

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

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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