The Declaration of Investor Independence sports one major difference from the other one: All dividends are not created equal.

Yup. Now that the dividend tax cut has spurred more companies to start or increase dividends -- over a 100 more this year than last -- we paraphrase the residents of Orwell's Animal Farm and spout, "Some dividends are more equal than others."

Yes, they may grow, but they also can be slashed or even eliminated. While long-term investors may endure cuts from the likes of Ford Motor (NYSE:F) because of more frequent increases, they may prefer companies that avoid cuts by keeping dividends manageable. These companies pay out some of the profits, but retain enough cash to fund the business and handle exigencies.

We may not want to be as many Eastman Kodak (NYSE:EK) shareholders today, worried that the fat 6.5% dividend may be cut this month, and instead prefer the lives of shareholders of Johnson & Johnson (NYSE:JNJ), Pfizer (NYSE:PFE), PepsiCo (NYSE:PEP), or even new dividend payer Microsoft (NASDAQ:MSFT), with stable though much smaller dividends.

How to know?

I've learned some methods from my colleague Mathew Emmert, editor of our Income Investor high-yield stock selection monthly. Here's one company that won't make Mathew's list and why.

Blue Hawaii?
 Hawaiian Electric Industries (NYSE:HE) kept appearing in my search for high-yield stocks. Founded in 1891, this holding company owns or controls an electricity-generating company, a bank, and other smaller related businesses. So it's part traditional electrical utility (mostly with oil-fueled plants), part regulated financial company, and part some smaller related ventures. State and federal regulations govern the utility, which must conduct regular proceedings before the state to establish rates, and the bank side, too.

As the de facto monopoly electrical power generator for Hawaii, however, it appeared to have quite a moat. With a sweet 5.6% dividend yield and revenues growing year over year for the last three quarters, it looked like a case of dividends plus growth.

Payout ratio
But then there was the pesky little matter of payout ratio. To the company's credit, it displays it clearly in financial statements. It paid out 176% of net income as common stock dividends in 2000, 100% in 2001, and 76% in 2002. In its latest quarterly report, it added the magnificent understatement that this payout must come down to 65% before the dividend could increase.

Where a 50% payout ratio is usually danger sign, utilities typically pay more -- as much as 85% on average, according to one reader. But even though Hawaiian Electric's payout came down to that range in 2002, the 100% and 176% numbers for 2000 and 2001 are astonishing. Any time a payout ratio is this high, you have to ask a number of questions. Is management starving business investment to pay the dividend? Is the current high payout an anomaly because projected growth will soon bring the ratio down? By definition, the company is meeting its debt obligations -- net income is income after interest expense -- but does it have wiggle room for a bad quarter or year?

And how on earth does a company pay out more than 100% or more?

Sell stock, pay dividend
Stock sales, that's where. For the last three fiscal years, the company added 1.1%, 3.7%, and 7.5% to basic shares outstanding and another 2.5% in the first six months of this year alone, raising enough to meet the dividend bill:

  
           ($ millions)       Dividends  $ From             PayoutYear   Paid     New Shrs. Dilution Ratio2003*  $28.5      N/A       2.5%     --2002    73.4    $32.5       7.5%     76%2001    67.0     78.9       3.7%    100%2000    68.6     14.1       1.1%    176%
*First six months only.

Without the stock sales, the dividend would have to be cut or paid for some other way, such as through issuing debt.

This defeats the value of the dividend to investors. If the company paid you 5.6% in 2002, it also diluted you 7.5%, so you actually paid 1.9% to own the stock. In 2001, you paid 3.7% to earn 5.6%, for a net dividend of only 1.9%. The dividend doesn't look so high anymore, does it?

One possible explanation
You might ask, how did this happen? The company has paid a dividend continuously since 1901. That says to me that they would sooner cut their throat than reduce or eliminate it. People get used to a dividend. The longer it goes without a cut, the more investors will be spooked by any. You start doing anything to avoid it.

So as expenses grew and revenues stagnated, the company scrambled. Dilution was better than facing shareholder wrath for a dividend cut. And perhaps the business would soon allow Hawaiian Electric to grow itself to a lower payout ratio. It may. For its shareholders sake, I hope it does. But it won't be a candidate on my list of dividend-paying stocks to own until at least then.

One note: I went with the company's payout ratio using dividends as a percentage of net income, but it's more helpful to use payout as percentage of free cash flow. Yet for some companies -- including Hawaiian Electric, which owns a bank -- it's tough to tease the right information out of the financials. That's a job for someone like Mathew, who finds stock ideas in Income Investor where people like me need help -- REITs, Master Limited Partnerships, and more.

Thanks to readers
Many thanks to all those who read my column last week and wrote with ideas about why four companies showed up with high growth in accounts receivable versus sales. I need to look into your excellent suggestions before writing them up with any conclusions.

Have a most Foolish week, and thanks for reading!

Senior Analyst Tom Jacobs is absolutely delighted to be in balmy New Orleans today, speaking at the annual convention of the National Association of Mutual Insurance Companies, a great organization. He owns shares of Microsoft and others disclosed publicly in his profile. We happy Motley Fools are investors writing for investors.