Stocktake: Don’t get mixed up with ‘moral responsibility’ and dividends

Investors often see dividends as additional income but that’s not how it works

Photograph: iStock

Photograph: iStock

 

Companies all over the world are coming under pressure to halt dividend payouts during the coronavirus epidemic.

However, Standard Life Aberdeen chief executive Keith Skeoch has a different take, last week arguing that companies that can afford to pay a dividend have a “moral responsibility” to do so in order to support the “substantial part of our society that is dependent on retirement income, and dividends”.

The thing is, you don’t need to depend on companies for dividend income – you can create your own home-made “dividend” by selling shares. Consider this example. Company A, priced at €1, pays a 4 per cent dividend. When the dividend is due, it distributes €4 to a shareholder with 100 shares and the share price falls by the amount of the dividend paid, to €0.96.

Income

In contrast, Company B doesn’t pay dividends so its share price remains unchanged, at €1. The shareholder sells four shares, gets €4 and their remaining shareholding is worth €96. Different dividend policy, same result.

Investors often see dividends as additional income, but that’s not how it works; dividends merely represent a shift of income from the share price to the dividend.

For investors, dividends hold psychological appeal but any financial or moral appeal is, alas, illusory.

The Irish Times Logo
Commenting on The Irish Times has changed. To comment you must now be an Irish Times subscriber.
SUBSCRIBE
GO BACK
Error Image
The account details entered are not currently associated with an Irish Times subscription. Please subscribe to sign in to comment.
Comment Sign In

Forgot password?
The Irish Times Logo
Thank you
You should receive instructions for resetting your password. When you have reset your password, you can Sign In.
The Irish Times Logo
Please choose a screen name. This name will appear beside any comments you post. Your screen name should follow the standards set out in our community standards.
Screen Name Selection

Hello

Please choose a screen name. This name will appear beside any comments you post. Your screen name should follow the standards set out in our community standards.

The Irish Times Logo
Commenting on The Irish Times has changed. To comment you must now be an Irish Times subscriber.
SUBSCRIBE
Forgot Password
Please enter your email address so we can send you a link to reset your password.

Sign In

Your Comments
We reserve the right to remove any content at any time from this Community, including without limitation if it violates the Community Standards. We ask that you report content that you in good faith believe violates the above rules by clicking the Flag link next to the offending comment or by filling out this form. New comments are only accepted for 3 days from the date of publication.