Can You Pay Dividends if You Have a Negative Retained Earnings?

by Dani Arbuckle ; Updated September 26, 2017
Businessman presenting a sustainable decrease development

Companies pay dividends to shareholders out of retained earnings. A company with negative retained earnings is said to have a deficit. It does not have any money in retained earnings, so it cannot pay out a dividend. To start paying a dividend, a company with negative retained earnings must generate sufficient revenues to make its retained earnings account positive.

How Retained Earnings Work

When a company is profitable, profits can be reinvested in the business -- for example a company could invest its profits in a larger factory or in acquiring another business -- or they can be paid out to shareholders as a dividend. The decision to issue dividends is up to the board of directors. But if a company is consistently unprofitable, its retained earnings may become negative. In this case, the board of directors have no funds in retained earnings, so it cannot pay out dividends.

Photo Credits

  • Staras/iStock/Getty Images
Cite this Article A tool to create a citation to reference this article Cite this Article