nmdhqbc wrote:Dod101 wrote:Don't forget that the 85% distribution rule puts a floor under the dividend.
Not sure what this means. Are you saying they have to distribute 85% of their underlying income? If so I'm not sure how that helps in current circumstances. Dividends are being cut so the underlying income will probably be going down. So the issue could only be that they want to distribute more than 100% of underlying income but are not sure if it is sustainable. The floor would surely only come into effect in the good years where dividends are rising.
Fundamentally ITs must distribute at least 85% 0f their investment income in any one year in order to maintain their IT status. This gives them the important right not to pay capital gains tax on realised capital gains so that puts a floor under the dividend. Sure, income/revenue is likely to reduce for many of them but there is this minimum that they must pay out, unlike say many of the FTSE companies who might be able to afford a dividend but chose not to pay out in these 'unprecedented times'. If they want to pay more than the minimum, then it needs to come from the Revenue Reserves (that is reserves set aside from earlier years where they pay out less than 100% of their investment income) or from capital in the form of realised capital gains.
It means that ITs are likely to at least pay some dividend, the 'floor' that I mention.