What dividends are paid out of
intermediate
Automated material · TradeAlmanac editorial deskPrepared by a language model from our stored data and checked by an editor.
A dividend is declared out of profit and paid in money. Between those two quantities lies a difference that decides whether the payout will repeat.
Profit as the base
The most common wording in a policy: a share of net profit under international standards.
The problem is that profit is an accounting figure, sensitive to revaluations and one-off items — Earnings quality: how much cash is in the profit.
Cash flow as the base
A more honest construction: a share of free cash flow — the money that can genuinely be distributed — Free cash flow: what is left for the owner.
Debt as the source
A company can borrow in order to pay a dividend. Formally the payout happened; in fact the shareholder was handed their own future money while leverage rose.
Covenants
Almost every policy contains a leverage condition: above a threshold the payout is cut automatically. It is the most common reason a stable payer suddenly pays less — Leverage: how much debt is too much.
What to check
The ratio of the payout to free cash flow over several years, and the trajectory of net debt. Those two figures answer the durability question better than a payment history does.
Related: Dividend policy: how to read it and what to believe in it.
Prepared by a language model from our stored data and checked by an editor.
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