How dividends work and why some companies never pay them

A dividend is the plainest transaction in finance — a company posts cash to its shareholders — and yet the decision behind it is one of the most revealing things a board ever does. Paying out says: we cannot use this money better than you can. Withholding it says the opposite. Everything else about dividend policy is machinery around that admission.

The machinery matters, though, because it is stricter than most investors realise. Under Part 23 of the Companies Act 2006, a company may only distribute accumulated realised profits — the "distributable reserves" on its balance sheet — not whatever happens to be in the bank. A business can be flush with cash and legally barred from paying a penny because past losses have eaten its reserves; equally, a profitable company can pay out more than this year's earnings by drawing on profits banked in earlier years. Directors who authorise an unlawful distribution can be personally liable to repay it, which is why capital reductions to convert share premium into distributable reserves are a routine piece of City housekeeping before a payout programme begins.

The calendar has its own choreography. The board declares an interim dividend on its own authority, while the final dividend needs shareholder approval at the AGM. The exchange then sets an ex-dividend date — on the London Stock Exchange, conventionally a Thursday — before which you must own the shares to be paid. Anyone buying on or after that morning buys without the entitlement, which is why the price mechanically drops by roughly the dividend amount at the open. A record date follows, the register is fixed, and weeks later the cash lands via CREST or a registrar such as Computershare or Equiniti.

Who actually wants that cash is a tax question. Since April 2024 the dividend allowance has been just £500 a year; above it, basic-rate taxpayers pay 8.75%, higher-rate 33.75% and additional-rate 39.35%. Profits retained inside the company face none of that at the shareholder level — they compound, and the investor pays capital gains tax only on sale, at lower rates and a moment of their choosing. For a founder or a wealthy individual outside an ISA, retention is often flatly better. The big natural buyers of dividends are the shareholders who pay no tax on them at all: pension funds, ISAs and SIPPs, charities. Dividend policy is, in part, a statement about which of these audiences a company is playing to.

That is the honest reason some companies never pay. A firm that can reinvest a pound at a 20% return has no business handing it to shareholders to redeploy at 7%. Amazon has never paid a dividend; Alphabet and Meta only began in 2024, once their reinvestment opportunities visibly thinned. On London's AIM market, most growth companies pay nothing, and the buyback has emerged as the flexible alternative: it returns cash without creating an expectation, because a paused buyback is a footnote while a cut dividend is a headline.

The British income habit

The FTSE 100 is the opposite culture. It yields around 3.5–4%, roughly triple the S&P 500, and its register is dominated by income funds and retirees who treat the payout as quasi-salary. Shell, HSBC, British American Tobacco and Legal & General have functioned for decades as bond substitutes, and the expectation has hardened into something close to contract. When Shell cut in April 2020 — its first reduction since the Second World War — the shock was treated as an epochal event rather than a routine capital-allocation choice. Vodafone spent years paying a dividend its free cash flow struggled to cover before finally halving it in 2024, and BT and BP have run similar gauntlets.

What the addiction costs

Defending a payout that the market treats as sacred means something else gives. Boards borrow to maintain dividends through downturns, trim capital expenditure and research budgets, and pass over acquisitions, because the share-price penalty for a cut arrives immediately while the penalty for under-investment takes a decade to show. Critics link the UK market's thin representation in technology, and its persistent valuation discount to New York, partly to this preference for extraction over compounding. A dividend is not free money; it is a transfer with tax friction attached, and the price paid at the point of purchase. The interesting question about any company is never whether it pays, but whether its answer matches what it could actually earn by keeping the cash.