Question

The COVID-19 pandemic adversely affects global economy, which forces many firms cut dividends. Do you think the “transient” dividend cut affects all the investors? You should use the knowledge from the textbook to answer this question.

Answer 1

Since i don't have any reference to this part of the question "You should use the knowledge from the textbook to answer this question.", I will answer it in a general way.

COVID-19 has affected the economy very harshly. This has made some biggest and renowned companies to shut down due to decrease in sales, increasing borrowings and investors withdrawing money.

Dividends is a major source of income for the investors. Even those who are just invested and for owners as well.

Cutting of dividends is never a good sign for the business and worse for the investors whose money is stuck there. It comes as a worrying sign for the investors. Cut in dividends is followed by a drop in the price of shares which makes it worse for the investors as they will be stuck there and have to bear losses on capital and revenue both.

It is important to understand the fundamentals of the business and check whether the company has the resources to bounce back from this. It is wise to stay invested in companies who wil be able to bounce back.

According to Bloomberg Quint, Dividend is almost 0.1% and 0.6% of total income of public and private sector banks respectively in India.For other companies, it is almost 14% of total income.

Many individuals consider dividend as their only steady soruce of income after retirement.

Many HNI's, QIB's also depend on dividend and interest income when investing/lending money as their only source of appreciation of capital.

Thus, the Pandemic will affect every investor for this temporary period but Investors have a choice to exit which they should take upon proper due diligence and analysis and hope their losses/opportunity costs are limited.

SUMMARY - Yes, for this year atleast all investors will be affected.