The market's big U-turn in March 2009 has rescued many a portfolio from utter ruin. But some companies haven't recovered the way that the overall market has -- and if you're unfortunate enough to own shares of some of those companies, you need to take a good hard look at whether they still make sense for you to keep in your portfolio.

The center of the recovery
One area in which the stock market's rebound has been most evident is in dividend stocks. During the first quarter of 2009, a record low number of stocks increased their dividends, while a record high number of stocks cut back on their payouts. It was the first time in the 55-year history of S&P's tracking dividend figures that the number of dividend cuts exceeded the number of increases.

Just a single year later, the situation has completely reversed. S&P reports that only 48 companies cut their dividends in the first quarter of this year, down fully 87% from its year-earlier peak. Nearly 400 were able to raise their dividends -- still well below historical levels, but a marked improvement from 2009. That suggests that many companies are in much better financial shape than they were a year ago.

More importantly, though, the companies that aren't making the grade are easier to spot. Dividend investors should be particularly critical about why dividend cutters have to reduce payouts in such a positive environment for stocks.

What's going on?
Let's take a closer look at some of the companies that have cut their dividends over the past six months:

  • Macerich (NYSE: MAC) -- down 17% to $0.50 per share.
  • Valero (NYSE: VLO) -- down 67% to $0.05 per share.
  • Dover Downs Gaming (NYSE: DDE) -- down 40% to $0.03 per share.
  • Cryptologic (Nasdaq: CRYP) -- no dividend paid in 2010 Q1.
  • Arkansas Best (Nasdaq: ABFS) -- down 80% to $0.03 per share.
  • El Paso (NYSE: EP)-down 80% to $0.01 per share.

The stories behind these announcements are as varied as the companies themselves. But taking a close look reveals some common themes.

Macerich is a real estate investment trust that invests primarily in shopping malls. Although it has reported positive net income in each of the past three years, its substantial capital expenditures mean that Macerich has fairly large negative free cash flow. REITs are required to pay their net income as dividends to qualify for favored tax status, but in 2009, the company resorted to paying part of its required dividends in stock rather than cash. The recent cut actually returned the company to an all-cash standard, but cash flow must eventually recover for Macerich before shareholders should feel truly comfortable.

Trucking is another sector that hasn't benefited from the rebound. Arkansas Best announced its dividend cut along with worse-than-expected earnings. Even J.B. Hunt (Nasdaq: JBHT), a much larger trucking operator by market cap, has seen earnings fall over the past five years in a tough environment for the industry that has seen sky-high fuel costs and increased competition from shipping alternatives.

The whims of the energy sector are responsible for Valero's and El Paso's woes. Although oil prices have rebounded sharply from their 2008 lows, natural gas has remained in the basement, which has in turn hurt El Paso's gas pipeline business. Meanwhile, Valero and other refiners constantly find themselves in the middle of a tug-of-war between the companies that produce oil and customers who buy refined products like gasoline and heating oil. When crude oil rises faster than prices at the pump, then Valero gets squeezed -- which is what contributed to its decision to slash its dividend.

Similarly, in the entertainment and gaming industry, times have been hard. During the downturn, Las Vegas-centered companies like MGM Mirage and Wynn Resorts took substantial hits, but they had the finanical depth to survive and bounce back somewhat along with the overall economy. Smaller operations like Dover Downs are more sensitive to overall business conditions, and cutting dividends is one of the easiest ways to conserve cash under tough circumstances. Moreover, Cryptologic has suffered from a U.S. ban on Internet gaming.

Keep your eyes open
Just because dividends in general are going up doesn't mean that the stocks you own will automatically follow suit. When companies are facing tough times, you can't count on a broad recovery to sustain their dividend payouts. Even companies that cut dividends may not be bad long-term investments. But if you're counting on regular income from them, you should question whether they really fit in your portfolio. If not, there are a host of other stocks you can choose from that will get the job done.

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