Why companies can cut their dividend payouts

An investor who conducts stock analysis to own a dividend-paying stock will always want the dividend to keep on increasing every year. If the investor currently owns a $5 dividend, the dividend will be worth more in the next 20 years. But the dividend can also be less valuable in 20 years due to inflation. This means that for the $5 dividend to be worth more in 20 years, the dividend increase should match with the inflation rate. Essentially, the best dividend-paying stocks an investor should own are those that increase in value annually at an amount that is more than the inflation rate.

Basically, companies pay out dividends from their cash reserves. This means that if a company is not generating a lot of cash, the company is more likely to cut the dividend amount or even eliminate the amount altogether. For most shareholders, cutting or eliminating the dividend is not good news. But in some cases, cutting or eliminating the dividend allows companies to conserve their money instead of going bankrupt. In case the company generates more cash reserves in future, then the company will be able to resume dividend payments. This factor should therefore tell investors that dividend investing is not always rosy.
Many companies in the financial sector or banking industry are more likely to experience dividend cuts. In the past, some banks have cut and others have eliminated dividend payments because they faced various problems that were related to subprime loans. Instead of continuing to pay out the dividends and risk the banks running out of crucial cash reserves, the banks simply decided to cut or eliminate the dividend amounts. Before an investor can buy dividend stocks, the investor should first determine the financial strength of the company in the next 10-30 years. The investor must also do valuations on the company just to be on the safe side.