A:

A dividend cut occurs when a dividend paying company either completely stops paying out dividends (a worst-case scenario) or reduces the amount it pays out. This will often lead to a sharp decline in the company's stock price, because this is usually a sign of a company's weakening financial position, which generally makes the company less attractive to investors.

Dividends are usually cut due to factors such as weakening earnings or a limited amount of funds available to meet the dividend payment. Typically, dividends are paid out from the company's earnings; if earnings decline over time, the company will either need to increase its payout rate or access capital from other places, such as its short-term investments or debt, to meet the past dividend levels. If the company uses money from non-earnings sources or takes up too much of the earnings, it may be putting itself into a compromising financial position. For example, if it has no money to pay off its debts because it is paying out too much in dividends, the company could default on its debts. But usually, it won't come to this, as dividends are usually near the top of the list of things cut when the company is faced with financial challenges.

This is exactly why dividend cuts are seen as a negative. A cut is a sign that the company is no longer able to pay out the same amount of dividends as it did before without creating further financial difficulties.

For more insight, read The Importance Of Dividends and Is Your Dividend At Risk?

RELATED FAQS
  1. Can dividends be paid out monthly?

    Find out if stocks can pay dividends monthly, and learn about the types of companies most likely to do so and how monthly ... Read Answer >>
  2. Why do some companies pay a dividend, while other companies do not?

    Dividends are corporate earnings that companies pass on to their shareholders. There are a number of reasons why a corporation ... Read Answer >>
  3. Which is better a cash dividend or a stock dividend?

    The purpose of dividends is to return wealth back to the shareholders of a company. There are two main types of dividends: ... Read Answer >>
  4. Is a dividend reduction a signal to sell?

    Although a dividend reduction is generally viewed as a signal to sell, the decision is not as clear-cut as if the dividend ... Read Answer >>
  5. What is the difference between the dividend yield and the dividend payout ratio?

    Learn the differences between a stock's dividend yield and its dividend payout ratio, and learn why the latter might be a ... Read Answer >>
  6. Are dividends considered an asset?

    Find out why dividends are considered an asset for investors but a liability for the company that issued the stock, and learn ... Read Answer >>
Related Articles
  1. Investing Basics

    How Dividends Work For Investors

    Find out how a company can put its profits directly into your hands.
  2. Investing

    The 3 Biggest Misconceptions of Dividend Stocks

    To find the best dividend stocks, focus on total return, not yield.
  3. Markets

    Due Diligence On Dividends

    Understanding dividends and how they work will help you become a more informed and successful investor.
  4. Investing Basics

    The Risks of Chasing High Dividend Stocks

    Dividend stocks offer enticing yields, but a lot can go wrong on the way to collecting that dividend payout.
  5. Investing Basics

    Don't Take Dividends For Granted

    Companies have been paying dividends to their shareholders since the 1600s and have given investors good reason to hold onto their shares for long time periods. For many investors, dividends ...
  6. Investing News

    Understanding How Mutual Funds Pay Dividends

    The process by which mutual fund dividends are calculated, distributed and reported is fairly straightforward in most cases. Here's a look.
  7. Investing Basics

    The Importance of Dividends in Your Portfolio

    Learn some of the primary reasons why dividends constitute a critical factor in the overall performance of a stock investor's portfolio.
  8. Investing Basics

    How And Why Do Companies Pay Dividends?

    The arguments for dividends include the idea that a dividend provides certainty about a company’s well being.
  9. Stock Analysis

    Solid Dividend-Paying Companies

    If you are looking to add dividends to your portfolio, don't miss these stocks.
  10. Investing Basics

    4 Reasons a Company Might Suspend Its Dividend

    Learn about the four most common reasons a company may choose to suspends its dividends, including financial trouble, funding growth and unexpected expenses.
RELATED TERMS
  1. Dividend

    A distribution of a portion of a company's earnings, decided ...
  2. Forward Dividend Yield

    An estimation of a year's dividend expressed as a percentage ...
  3. Indicated Yield

    The dividend yield that a share of stock would return based on ...
  4. Dividend Rate

    The total expected dividend payments from an investment, fund ...
  5. Indicated Dividend

    The total dividends that would be paid on a share of stock throughout ...
  6. Accumulated Dividend

    A dividend on a share of cumulative preferred stock that has ...
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center