Can Dividends Be Negative? (Everything You Need To Know)

Dividends have the potential to transform your financial future and really jumpstart legitimate passive income generation. At the same time, though, dividends should not ever be considered a “sure thing”.

There’s been a lot of talk in the investment world of late about “negative earnings” – but you shouldn’t confuse that term with negative dividends. At no point whatsoever will you be on the hook for paying dividends that go negative. You just might not receive a dividend payment is all.

To sort this out a little more in depth we’ve put together the inside info below.

Dividend Overview

But before we get into the meat and potatoes of “negative dividends” and how they operate, it’s important to touch on what dividends are, how they work, and why they are such an attractive investment option.

To put it simply, think of dividend payouts as “cream” on top of the potential increased value you can get from shares you hold for a specific company.

Some investors (including some of the most successful investors in history) consider dividend payouts “cash in your pocket” – practically guaranteed payouts that come on a quarterly basis, payouts for each individual share, and payouts that aren’t going to have the same kind of volatility that share prices might.

Dividends are a surefire sign that a company is in good financial health.

After all, if a company wasn’t performing well (even outperforming expectations) they would have little to no incentive to offer dividend payments in the first place. Nothing would tank the value of their companies or pylon liabilities faster.

At the same time, though, it’s important to remember that dividends (the way they are currently structured, anyway) are never guaranteed.

Even companies that have decade-long experiences of paying dividends out like clockwork, every single quarter, may or may not continue to do so in the future.

Dividend payouts are almost always at the discretion of the board. It is bad business to drop dividend payments except for in extreme circumstances, and in the case of accumulated dividends those payments may have to be made later down the line to clear them from the balance sheet completely.

Can Dividends Be Negative?

As far as negative dividends are concerned, though, you never have to worry about being on the hook for paying extra for the shares you hold the way that a company might payout a dividend.

Negative dividends are NEVER “reverse dividends”.

Negative dividends do exist, though, even though they are quite rare.

In 2009, number of rules were instituted as a result of the growing “Great Recession” to dictate how companies that underperformed handled their dividend situation.

In December 2009, the Revenue Procedure 68/08 allowed REITs to declare dividends for as much as 90% stock (and as little as 10% cash) while still remaining in full compliance with established IRS rules.

That could make “negative dividends” a reality.

Here’s just a quick example:

Let’s say, just for arguments sake, that a company decides to offer a one dollar dividend for every share outstanding. Let’s say that they followed the REITs rule we highlighted above (a dividend that is 90% stock and just 10% cash) – meaning they offer a dime in cash and $0.90 worth of stock.

If the stock itself trades down even just a dollar shareholders will still get a dime for every share, but they’ll still have an extra dollar in tax liability. This means that instead of getting a dollar for every dividend the individual holding those shares is actually sitting at a negative value of $-0.20 when it comes time to pay the tax man.

Not ideal, right?

Things can get even more complex than that when you start talking about dividends that get sliced and diced even more so, especially when the bulk of the dividend is getting paid out in stock. Stock – until it is sold – is essentially useless.

Those kinds of dividends aren’t worth the paper they aren’t printed on!

Negative Payout Ratio

It’s also important to understand the idea of a negative payout ratio and how that impacts the dividends that you might have been otherwise expecting.

Abnormally high yields can look very attractive when shopping around for “income investing dividends” – but if a company decides to cut the dividend, which is entirely up to the board’s discretion, you could be looking at a much lower yield (as well as widespread capital losses on the stock you’ve purchased, too).

This is why it’s such a big piece of the success puzzle to look at things like payout ratios – especially negative payout ratios. You don’t want to find yourself on the wrong side of things (like we mentioned with our REITs example earlier).

Closing Thoughts

When you get right down to it, there’s no such thing as “negative dividends” – at least not when it comes to individuals having to pay a company just for the privilege of owning individual shares of their stock.

No, that’s not going to happen anytime soon.

Instead, negative dividends almost always tieback to the examples that we highlighted earlier. Examples where dividends are legally allowed to be paid out not just in cash, but in a combination of cash and stock – particularly when stock prices have a tendency to tumble.

It might look pretty beefy to see a couple of extra shares of stock get added to your portfolio when dividend payments rolled around. But when you poke around “under the hood” a little closer you might find that you are actually losing money on the deal, especially if the value of the stock you received drops like a rock before you’re able to realize those games.

When you get right down to it, there’s a lot more to income investing through dividends than most people realize.

Be sure that you understand the concept of negative shareholder equity and negative payout ratios before you start jumping headfirst into dividend paying stocks.

You’ll have a much better idea of which stocks are going to generate the kind of money you’re looking for and which ones just look like red-hot deals but are really anything but that!

Can Dividends Be Negative? (Everything You Need To Know)