Is the Dividend Crisis Finally Over?

The last two years have caused investors in dividend stocks a great deal of pain. Yet even as the stock market has shown an impressive rally, the news on the dividend front continues to be extremely negative.

A recent report from Standard & Poor's noted that out of the thousands of stocks it tracks, only 233 increased their dividends between April and June. That's a record low over the 50-year period during which S&P has tracked dividend information. It's also less than the 250 stocks whose dividends fell during the second quarter.

The impact on investors
Obviously, dividend cuts have a huge impact on shareholders in those companies. Often, investors are attracted to dividend-paying companies whose shares have dropped in price, tempting bargain-hunters with their above-average dividend yields. Yet if the company's business deteriorates so much that the company can no longer pay those dividends, the resulting exodus of current owners often causes shares to fall even further, creating big losses for shareholders.

However, the explosion in the number of dividend cuts has called the entire investing strategy of pursuing dividends into question. With even longtime dividend stalwarts like General Electric (NYSE: GE  ) and Dow Chemical (NYSE: DOW  ) admitting defeat and cutting their payouts, it's difficult to have confidence that any company's dividend is completely safe.

Moreover, given the continuing difficulties in the economy, hoarding cash remains an attractive way for companies to build a safety net. In this environment, no company wants to risk not having enough cash to keep operating if last year's credit crunch repeats itself. If that means cutting dividends, then companies have never had a better reason to do so.

Don't give up
However, not all of the news on the dividend front is bad. There are several reasons why you shouldn't give up on dividend stocks:

  • Some stocks are still raising dividends. Dividend cuts get the biggest news coverage, but plenty of companies have continued streaks of raising dividends in 2009. Just in the past quarter, the following companies have chosen to extend their histories of higher dividend payments:

Stock

New Dividend Yield

Consecutive Dividend Increases

Target (NYSE: TGT  )

1.7%

37 years

PepsiCo (NYSE: PEP  )

3.2%

37 years

IBM (NYSE: IBM  )

1.9%

9 years

Johnson & Johnson (NYSE: JNJ  )

3.3%

46 years

General Mills (NYSE: GIS  )

3.2%

5 years

Source: Yahoo! Finance, DividendInvestor.com.

  • If you've made it this far ... After a year and a half of recession, most companies in the worst financial condition have already cut their dividends. Those that remain have every incentive to maintain their reputations by sustaining their current dividends.
  • Alternate financing available. Moreover, the recent rally has pulled stock prices out of the basement, giving many companies the chance to raise cash by making secondary offerings of new shares. Although issuing new shares dilutes existing shareholders, it avoids the enduring stigma of a dividend cut.
  • A recovery should end the crisis. When the economy starts to recover, just seeing the light at the end of the tunnel should convince many companies that the worst of the cash crunch is over. That in turn will encourage those with hoards of cash to return value to shareholders through dividend increases, and companies of more modest means to maintain their current payouts.

Dividend cuts are always a threat, given that even the biggest companies can suddenly find themselves in financial difficulty. But that doesn't mean you should give up on dividend investing entirely. As long as you're careful to choose the most stable, least risky dividend-paying stocks you can find, your portfolio should survive to see the end of the dividend crisis.

For more on investing for dividend income:

Get some great dividend stock ideas in our Motley Fool Income Investor newsletter. Johnson & Johnson and PepsiCo are just two of the stocks we're currently recommending to our subscribers. You can get a free look at all our current recommendations today with a 30-day trial -- just click here to get started.

Fool contributor Dan Caplinger plans to make dividends a big part of his own economic recovery plan. He owns shares of General Electric. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy keeps paying out great information to you.


Read/Post Comments (3) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 22, 2009, at 7:35 PM, lebaresq wrote:

    Public utilities are traditional 'widows and orphans' income holding (common & preferreds) withstanding market downturns, bedrock of my portfolio. Early this year went into oil & gas MLPs to enhance investment cash flow. MLPs remain stable payers, public utilities being among their customers. Now exploring high yield (>7% issue rate) preferred stocks priced under par to lock in current payouts plus cap gain potential upon issuer strengthening, will hold intermediate term (5-10 yrs) until called at par. Oil-dominant domestic royalty trusts are also worth a look. Opportunities abound in this sector.

  • Report this Comment On July 25, 2009, at 10:07 AM, boysmakegoodpets wrote:

    Jerry: just be sure to do more research on those TopYields.nl listings - as with many such lists, a lot of the yields are out of date, having been slashed since the list came out. the top yield on the NYSE list, for example - Seaspan Corp (SSW) - is no longer the 23.18% monster it's shown to be on there; the annual dividend's been cut from $1.52 to $0.40, making that 23.18% yield a rather less-exciting 6.1%. still a nice yield, but not nearly what the list indicates.

  • Report this Comment On July 27, 2009, at 1:07 AM, DAnelli wrote:

    Lebaresq: Glad to find someone with same strategy as me. Entered market in feb09, first time in my life, and targeted on HCS, DCE preferreds with 13% yields, and later in MWE (gas partnership). Already up 40% avg but will not sell: will keep them for 10 years. Now looking for some other picks. Utilities look fine but yieldz are...low and slow. Any other sector to look at? Maybe an ETF on dividend?

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