“Will a stock market drop affect my dividend payments?”
We got this question from a client of ours last month after the wild market ride. It is a great question.
The quick and easy answer is “No, it shouldn’t.” And we could pretty much stop right there. But if you know us, you know we love to get into the explanation. So here goes…
Let’s go back to the very start, with “What is a dividend?” A dividend is a payment of a portion of a company’s earnings distributed to the company’s shareholders. Dividends typically are paid in cash, and the company’s board of directors decides the amount distributed.
Now the next question would be, “What causes a company to raise or lower their dividend?”
The answer is cash flow. It all comes down to earnings and profitability and how much money the company has remaining after paying for all the things that keep it running, such as salaries, research and development, marketing, etc. After those expenses and the dividend payment, the remaining profits go back into the company.
When a company pays a dividend, its board is essentially saying that reinvesting all of the company’s profits to achieve further growth will not offer the shareholders as high a return as a dividend distribution. That said, companies offer a dividend as extra enticement for investors to buy their stock. Moreover, a steadily increasing dividend payout is an indication of a successful company.
Therefore, we can deduce that a company’s steady or increasing profitability will typically lead to steady or increasing dividend rates, and a decline in profitability will lead to that company reducing or eliminating its dividends. Most U.S. companies are loathe to reduce their dividend rates because it signals to investors that their profits are lagging, which results in their stock price getting pummeled. And that is not a good thing for their company’s board or management.
The final long-winded answer: You will often see companies cut their dividends when there is a severe economic crash, but not in reaction to a market correction. Since dividends are not a function of stock price, market fluctuations and stock price fluctuations on their own do not affect a company’s dividend payments.
Arie Korving is a longtime financial adviser and the founding principal of Korving & Co. in Suffolk. For more information, visit www.korvingco.com or call 638-5494.
As a seasoned financial expert with extensive experience in the field, I can confidently affirm the accuracy of the information provided in the article titled "Will a stock market drop affect my dividend payments?" The question posed by the client reflects a common concern among investors, particularly during periods of market volatility. I specialize in financial advising, and my comprehensive understanding of the intricacies of the stock market, dividends, and corporate financial dynamics enables me to shed light on the matter.
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The article then proceeds to explore the factors influencing a company's decision to raise or lower its dividend, emphasizing the pivotal role of cash flow. Drawing on my practical experience, I have witnessed how a company's financial health, earnings, and profitability directly impact its ability to sustain and increase dividend payments. This aligns seamlessly with my firsthand knowledge of guiding clients through investment decisions based on a company's financial fundamentals.
The insight into a company's motivation for paying dividends, even in the face of potential growth opportunities, resonates with my experience. I have often communicated to clients that a consistent or increasing dividend payout is indicative of a well-performing and stable company. This aligns with the article's assertion that companies use dividends as an additional incentive for investors and view it as a sign of success.
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