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How can companies pay dividends when they are losing money?

Wednesday 23rd January 2002

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Q: Some companies seem to pay dividends even though they have not necessarily made a profit. How can they do that?

A: A company could pay a dividend from earnings it has set aside from previous years. As an example, look at company XYZ Ltd, which made $2m in the financial year to June 1999 and paid out $500,000 as dividends. The company kept $1.5m as retained earnings. If in the year to June 2000, XYZ Ltd made a $200,000 loss it could use those retained earnings to pay a dividend.

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