When it comes to declaring and paying dividends, current earnings per share has nothing directly to do with whether a company is able to pay a dividend. A company with a lower earnings per share (EPS) than its dividend in a current year may be coming off of a string of more profitable (high EPS) years, from which it has set aside cash to pay future dividends.

The only real numbers that matter in paying dividends are "retained earnings" and available cash. From a management point of view, retaining some of the shareholders' earnings quarterly or yearly makes a lot of sense. Having a large retained earnings balance allows a company to pay consistent dividends with no negative surprises. In addition, the company can to keep cash on hand to reinvest in its future expansion.

On a related note, many investors do not realize that a company's earnings per share is calculated after the higher yielding preferred stock dividends have been paid. In other words, a large portion of a company's dividend costs already may be reflected in the EPS number that most investors look at. (See also: Types of EPS.)

  1. How do dividends affect retained earnings?

    Find out how distribution of dividends affects a company's retained earnings, including the difference between cash dividends ... Read Answer >>
  2. Cash dividend or stock dividend: Which is better?

    The purpose of dividends is to return wealth back to the shareholders of a company. There are two main types of dividends: ... Read Answer >>
Related Articles
  1. Investing

    Why Dividends Matter

    Seven words that are music to investors' ears? "The dividend check is in the mail."
  2. Investing

    Due Diligence On Dividends

    Understanding dividends and how they work will help you become a more informed and successful investor.
  3. Financial Advisor

    How Mutual Funds Pay Dividends: An Overview

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

    AAPL: Apple Dividend Analysis

    Apple's dividend has had healthy growth ever since its 2012 reinstatement, thanks to Apple's continuously rising revenue, earnings and operating cash flow.
  5. Investing

    WMT: Wal-Mart Dividend Analysis

    Wal-Mart raised its dividend for the 43rd consecutive year, despite losing over 25% of its market value in 2015, and its dividend remains healthy in 2016.
  6. Retirement

    Reinvesting Dividends Pays in the Long Run

    Find out why dividend reinvestment is one of the easiest ways to grow wealth, including how this tactic can increase your investment income over time.
  7. Investing

    Dividend Yield For The Downturn

    High-dividend stocks make excellent bear market investments, but the payouts aren't a sure thing.
  8. Investing

    The Best 8 Funds For Regular Dividend Income

    Here's a list of the top mutual funds which pay regular dividends, for frequent income.
  1. Dividend

    A dividend is a distribution of a portion of a company's earnings, ...
  2. Dividend Rate

    The total expected dividend payments from an investment, fund ...
  3. Accelerated Dividend

    Special dividends paid by a company ahead of an imminent change ...
  4. Cash-And-Stock Dividend

    A corporation distributing earnings to its shareholders as both ...
  5. Special Dividend

    A non-recurring distribution of company assets, usually in the ...
  6. Property Dividend

    An alternative to cash or stock dividends. A property dividend ...
Hot Definitions
  1. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  2. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  3. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  4. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  5. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  6. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
Trading Center