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Question
Justify the following statement.
Dividend is paid out of the profits of the company.
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Solution
- Shareholders invest in the company’s shares with the aim of earning returns out of the profits of the company.
- The shareholders get dividends as a return on their investment.
- The shareholder, being the owner of the company, is entitled to a share of the company’s profits.
- A dividend is a share of the distributable profits of the company. Under any circumstance, the company cannot pay dividends out of capital. The payment of a dividend out of capital is illegal and attracts a penalty.
- Therefore, the company pays the dividend from its profits.
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