Frightening News About Dividend Stocks

For dividend lovers, the past year has been brutal.

Dividend cuts have come at the fastest pace in more than 50 years. Check out some of these companies that have cut their dividend in the past 12 months or so:

Company

Dividend Cut

JPMorgan Chase (NYSE: JPM  )

86%

Fifth Third Bancorp (Nasdaq: FITB  )

98%

Capital One Financial (NYSE: COF  )

87%

Vulcan Materials

49%

Dow Chemical

64%

General Electric

68%

Those aren't even modest little trims. They're whoppers. And for some of these companies, cuts like this haven't happened in a long time. In its 112-year history, Dow Chemical, for example, had never cut its dividend. For General Electric, you'd have to go back 71 years to find the last reduction.

The news gets even scarier. Ned Davis Research assessed S&P 500 stock returns from January 1972 to April 2009, based on companies' dividend policies:

Category

Annual Gain, 1972 to 2009

$100 Became ...

Dividend Cutters or Eliminators

0.5%

$120

Non-Dividend Payers

0.7%

$129

S&P 500

6.2%

$941

Dividend Payers With No Change in Dividends

6.2%

$941

Dividend Growers and Initiators

8.7%

$2,246

Monthly data, Jan. 31, 1972, to April 30, 2009. Copyright 2009 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All rights reserved.

That data may frighten investors who've just watched blue chips such as GE and Dow Chemical reduce their payouts to shareholders. Let's examine the implications:

  • S&P 500 companies that cut or eliminated their dividends are dead last in terms of total returns. So you'll want to avoid dividend blowups, and to do so be extra mindful of high payout ratios, companies with industry headwinds, and dividend payers with iffy track records.
  • Non-dividend payers weren't all that much better -- they turned $100 into just $129 over that time frame.
  • By a substantial margin, dividend growers or initiators were the best in breed among S&P 500 stocks.

Are 37 years not enough for you? In "The Secret of Dividends," my colleague Shannon Zimmerman explained that between January 1926 and December 2006, "41% of the S&P 500's total return was due not to the price appreciation of the stocks in the index, but to the dividends its companies paid out."

What to do
Clearly, dividends cut both ways. The lesson, then, is to focus on companies that have a history of increasing their dividends. Here's a way to start doing just that.

1. Look for overachievers. You can find such companies through the Dividend Achiever index, which features companies that have upped their dividends for at least 10 years in a row.

2. Screen. The Dividend Achievers list features more than 275 U.S. companies, so you'll then want to narrow down your search. Here are some companies that meet the following screening criteria:

  • They are each Dividend Achievers.
  • They have at least a three-star rating from our Motley Fool CAPS community.
  • They have increased their payouts by at least 10% per year for the past five years.

Company

CAPS Rating (out of 5)

Dividend Yield

5-Year Dividend Growth Rate

Caterpillar (NYSE: CAT  )

****

3.6%

15%

Walgreen (NYSE: WAG  )

****

1.7%

21%

Sysco (NYSE: SYY  )

*****

3.8%

13%

Lowe's

***

1.7%

35%

Archer-Daniels-Midland (NYSE: ADM  )

****

2.0%

13%

Sources: Indxis, Motley Fool CAPS, MSN Money.

3. See our favorite stocks. We'd love to introduce you to many promising dividend payers in our Income Investor service, which you can try for free. On average, its picks are beating the market handily and boast an average dividend yield of 5.5%. Click here to learn more about a 30-day trial.

Last lessons
Finally, a glance at the returns of non-dividend payers should drive home how much your portfolio might suffer if it doesn't have some solid dividend payers in it. Note, after all, how close the returns are for dividend cutters and non-payers. There have been time periods in which dividend cutters still came out ahead of non-payers. Ignore the awesome power of dividends at your own portfolio's peril.

Already an Income Investor subscriber? Log in at the top of this page.

This article was originally published on May 19, 2009. It has been updated.

Longtime Fool contributor Selena Maranjian owns shares of General Electric. Lowe's Companies, Sysco, and Vulcan Materials are Motley Fool Inside Value picks. Sysco is a Motley Fool Income Investor recommendation. The Motley Fool is Fools writing for Fools.


Read/Post Comments (4) | Recommend This Article (4)

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 August 29, 2009, at 12:58 AM, dinksta wrote:

    REIT's are still hot right now for div's. I don't care what anyone says. Some of them pay high dividends still to this day. Currently, one of my positions are ANH. Not bad, solid company. Balance sheet and all fundamentals pertaining are excellent even in this "mortgage crisis".

  • Report this Comment On August 29, 2009, at 11:10 AM, KanuckSteph wrote:

    Good article. People focus too much attention on the stock price and price appreciation when they should focus more on the dividend or 'cashflow'.

  • Report this Comment On August 29, 2009, at 1:24 PM, ElCid16 wrote:

    When a company cuts a dividend during a non-recessionary period (which was the case a majority of the time between 1972 - 2009), its likely that the business model is flawed and that the company is in trouble for reasons other than macro-economic problems. During a severe recession, however, a company may become a victim of revenue loss simply due to overall economics problems and not necesarily due to a flawed business model, requiring a dividend cut. A larger percentage of companies who have increased their dividend in the past two years will probably generate more gains in the coming years than the percentage of companies who cut their dividend in the past two years. I still think its important not to label all dividend cutters - especially from this recession - as automatic losers...

  • Report this Comment On August 31, 2009, at 2:57 PM, RaulChapin wrote:

    My 2 cents, beware of the “correlation-implies-causation” fallacy. If A and B happen seemingly together, it must follow than B happens because of A.

    How is this relevant?

    Companies that have done well would be able to increase their dividend. This however does not work in reverse, just because a company increased its dividend it does not follow that it will do well. (Given, there is the requirement for at least 3 stars caps rating…but could this be a test of herd mentality more so than of company quality?)

    Another thing to consider, just because a company has increased its dividend steadily in the past it does not mean that it can or will in the future or that its business will even exist in the near future. Further more, if its shares are held primarily because of its dividend, when the dividend is reduced it would be likely that a sell off would occur, hitting the ones holding for the long term with both a dividend cut and a price reduction.

    Focusing an investment strategy with Dividends growth as a main portion of it could be similar to focusing your investing strategy on increased share price in the past (Momentum?) Such a strategy might work well in a bull, but will it work on other kinds of markets and most importantly would it work in a bubble?

    Ah and just to bring the point home… rental property would be a good comparison to this dividend approach. Rental property traditionally would be seen as a solid investment the property would traditionally appreciate (growth) and it would also generate a steady income (yield), sure rental property (at least in Canada) has not had such explosive growth as owner occupied homes, but the possibility for a bubble is still there.

    I think the article is interesting an a comparison with other similar strategies (before their collapse) to back test it for safety would make it even better. IE how are dividend paying stocks similar to real state investment, how are they so different that a bubble is less likely or if it is just as likely how to know that we do not currently have one in the making?

    Like Socrates, I do not have the answers; I just like to bring up the questions 

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