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My understanding of dividends is that the company pays each shareholder a fixed amount of money per share they own. I can see how this would work if the company is in profit, because the company can just say that they will use x % of its profits to cover the dividends.

However, what if the company is not in profit? Is it usual for the company to continue paying dividends even though this means they will be going even further into debt? Or do companies usually stop paying dividends at this point?

Karnivaurus
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1 Answers1

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Yes the company can still pay dividends even if they aren't making a profit.

1) If the firm has been around, it might have made profits in the past years, which it might be still carrying (check for retained earnings in the financial statements).

2) Some firms in the past have had taken up debt to return the money to shareholders as dividends.

3) It might sell a part of it's assets and return the gain as dividends.

4) They might be bought by some other firm, which returns cash to shareholders to keep them happy.

It pays to keep an eye on the financial statements of the company to check how much liquid money they might be carrying around to pay shareholders as dividends.

They can stop paying dividends whenever they want. Apple didn't pay a dividend while Steve Jobs was around, even though they were making billions in profits. Many companies don't pay dividends because they find it more beneficial to continue investing in their business rather than returning money to shareholders.

DumbCoder
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