Some fellow investors argue that a dividend cut might not necessarily be a bad event, since management shows proactive steps in order to conserve cash until the company situation turns better. Furthermore, if many companies cut their dividend, which was the occasion during The Great Depression, I would be selling at low prices which would never again be seen for decades to come. Since markets could overshoot higher or lower on positive or negative news, selling right after the bad news of a dividend cut could be an example of buy high, sell low investment proposition. Last but not least, another argument is brought up, concerning the fact that stockholders should act as owners and be fine with a dividend cut, as it will conserve cash for the company and help it in its recovery.

While I realize that these are some valid concerns, I disagree with them for several reasons. First, if a company that has increased or maintained its dividend cuts or suspends its dividend, it shows that it doesn’t have a firm grasp of the current situation due to it being a cyclical company or because its business model is broken. Dividends are typically a sacred cow in US, and companies like to please shareholders with stable or increasing payments over time. The best dividend friendly companies out there make their business decisions with their shareholders in mind. They are careful with the capital allocation process so that their new ventures do not collapse causing the company to lose money and forego a dividend payment. Once management cuts or suspends its dividends, there is nothing that could stop them from cutting the dividend again or suspending the payments indefinitely. Furthermore, a company that shows fiscal irresponsibility to be unable to maintain its dividend payment is in great danger to even declare creditors protection.