Corporate dividends during the economic crisis
- AS, A Level, IB
- 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.
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
You might also like
Exam support for 2022
Online Grade Booster Courses for A-Level Exams in May & June 2022
Exam technique, advance information support, live revision and more from the tutor2u subject specialist teams