The Worst News in 53 Years

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Welcome to Purgatory, Fool. Your dividends are no longer good here.

Research from Standard & Poor's shows that 288 of the roughly 7,000 public companies that report dividend information decreased their payouts during the last three months of 2008. It was the worst quarter for dividends since 1956, when S&P began collecting such data.

For the year, Capital IQ found 485 dividend reductions by companies and closed-end funds. Notable 2008 cutters included Fortress Investment Group (NYSE: FIG), OfficeMax (NYSE: OMX), and Honda Motor (NYSE: HMC).

At least there's Prozac
If this sounds like a huge problem, it is. According to research from Wharton professor Jeremy Siegel, during the 132 years between 1871 and 2003 only 97% of returns came from dividends on the original investment.

Big gains in 2003, 2004, and 2006 may have altered the equation some since but, for the most part, dependable dividends continue to help produce returns, especially among blue chips. The large-cap-weighted S&P 500 index yields more than 3% as of this writing.

What we don't know is whether that yield, or any yield, is sustainable. The Great Dividend Implosion of 2008 has raised doubts. Thanks, Washington Mutual. You, too, Wachovia.

Is there any hope? Not really, says S&P analyst Howard Silverblatt. Quoting from his recent interview with the Indianapolis Star:

Companies are not willing to commit to increases, but they don't want to have to cut their dividends because that's a poor sign. There's a lot of moving parts here ... Dividends are very insecure.

And the audience replied, "How insecure are they?"
Silverblatt is probably being cautious because, as an analyst, he's paid to be. Yet the truth about 2008 is that it wasn't as bad a year for dividends as the headlines suggest.

In fact, it wasn't even close. Capital IQ spotted 1,744 dividend increases last year -- firms were 3.6 times more likely to raise their payout than lower it. History favors increases even more:

Year	Dividend Increases	Dividend Reductions	Ratio
2008	1,744	485	3.6 to 1
2007	1,973	119	16.6 to 1
2006	2,032	318	6.4 to 1
2005	2,038	217	9.4 to 1
2004	1,629	96	16.9 to 1

Source: Capital IQ, a division of Standard & Poor's.

Notable 2008 dividend boosters included Eli Lilly (NYSE: LLY), AT&T, Graco (NYSE: GGG), and BB&T (NYSE: BBT), a recommendation of our Motley Fool Income Investor service.

Be a Fool for dividends
Arguably the worst year for dividends in the last half-century and hundreds of firms still raised their payouts. These are the stocks you bet on for the very long term. Stocks that, given enough time, can yield you more than 3,000%.

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This article was originally published on Jan. 27, 2009. It has been updated.

Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. BB&T is an Income Investor pick. The Motley Fool is investors writing for investors.