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

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.

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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.