How do retained earnings affect shareholder dividends?

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The amount of retained earnings has a direct bearing with a firm’s capability of distributing dividends to the shareholders. If a company has retained a lot of earnings then it can pay a portion of such earnings to the shareholders in form of dividends. On the other hand, if the figure realized from retained earnings is low or negative it means that the firm has little or no money to reward its shareholders with dividends but may anyway have to reinvest the money in the business or used it to clear its outstanding debts. It is a reserve from which dividend distributions are made during the unfavorable or unprofitable period. Still, when a company has high retained earnings and no dividends it raises a lot of concern from shareholders about the business’s capital management plan.

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