Why would a company make drastic cuts to its dividend payments?

By Chad Langager AAA
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. 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 ...
  2. What metrics should I evaluate when looking for high-yielding dividend stocks?

    Evaluate high-yield dividend stocks to determine if they are a good investment to produce steady income. Learn what questions ...
  3. What's the safest way to invest in high-yielding dividend stocks?

    Learn about some of the most important safety factors that you need to consider before you invest in high-yielding dividend ...
  4. What's the difference between retained earnings and revenue?

    See why retained earnings and revenue are both considered important measurements of a company's financial performance, and ...
RELATED TERMS
  1. Paid-Up Additional Insurance

    Additional whole life insurance that a policyholder purchases ...
  2. Accelerated Dividend

    Special dividends paid by a company ahead of an imminent change ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. Payout Ratio

    The proportion of earnings paid out as dividends to shareholders, ...
  5. Retention Ratio

    The proportion of earnings kept back in the business as retained ...
  6. S&P 500 Dividend Aristocrats

    Companies that have had an increase in dividends for 25 consecutive ...
Related Articles
  1. What is the difference between corporate bonds and preferred stock? The following are a list of pros and cons for each investment.
    Trading Strategies

    Preferred Stocks versus Bonds: How to ...

  2. How did investors select worthy alternatives so quickly given the majority of the assets were liquidated at a break neck pace following Gross’ resignation?
    Investing

    Why BOND Still Might Be In A Class Of ...

  3. How can you keep more of what you make or made when you retire? Minimize the taxes from short-term trades and taxable interest income.
    Investing

    Keeping More Of Your ETF Capital Gains ...

  4. Curious about preferred shares? Here's what you should know about these bond-like instruments.
    Trading Strategies

    What You Need To Know About Preferred ...

  5. Investing Basics

    Investor, Know Thyself: Choose A Stock ...

Trading Center