Dividend is paid out of profits of the company.

Answer: The statement is true.

Dividend is the share of divisible profits distributed among shareholders as a return on their investment. Under Section 123 of the Companies Act, 2013, dividend can be declared or paid only out of:

1. profits of the company for the current financial year, after providing for depreciation;
2. undistributed profits of previous financial years, after providing for depreciation; or
3. money provided by the Central or State Government for payment of dividend in pursuance of a guarantee.

The company may also transfer such percentage of profits to reserves as it thinks fit before declaring dividend. Dividend cannot be paid out of capital, because paying dividend out of capital would reduce the capital, mislead shareholders and endanger the security of creditors. Also, if the company has failed to repay deposits or interest, it cannot declare dividend on equity shares while the default continues.

Thus dividend is always paid out of profits of the company.