Naked or uncovered dividend refers to dividends paid out from which source?

• A. Undistributed profits from previous years when the current year's profits are insufficient
• B. Current year's profits only
• C. Dividends paid after the company goes bankrupt
• D. Dividends paid to all shareholders regardless of ownership

Answer: (A)

A naked or uncovered dividend is funded from profits that were built up in earlier years when those profits are carried forward but the current year's profits are not enough to meet the dividend. In other words, the payout is paid out of undistributed retained earnings from previous years rather than from the current year’s profits. It remains a distribution of profits, not capital, and it’s not tied to bankruptcy or to paying everyone equally regardless of ownership. So the source described best is the undistributed profits from prior years used because the current year’s profits are insufficient.