If you're handy with dividend math, you know that as a stock price rises, its dividend yield drops, and vice versa. That's because the dividend yield is a result of the annual dividend divided by the current stock price. You probably also know that while the stock price changes many times every day, the dividend amount changes only every year or two, on average.
Here's one thing that many of us tend to forget, though: Although we're used to seeing dividend payments rise over time, they also sometimes fall. Look at McDonald's (NYSE: MCD), for example. Ten years ago, it paid an annual dividend of $0.164 per share. That figure rose to $0.40 by 2003, and then last year, McDonald's gave its dividend a whopping 50% boost, from $1.00 to $1.50. Meanwhile, Washington Mutual's (NYSE: WM) dividend rose from around $0.50 per share a decade ago to $2.24 in 2007, only to be slashed 73% last month, to $0.60.
What's going on? Well, this phenomenon isn't new. When companies and industries struggle, they'll often reduce or even eliminate their dividends. Ford (NYSE: F), for example, is cutting its dividend entirely, after reducing it by 50% a little while back. Companies do try hard to avoid cutting a dividend, though, since doing so is a big red flag for investors. For instance, Washington Mutual's shares dropped significantly after news of its dividend cut.
What to do
Fortunately, figuring out which dividends are safe and which aren't is not entirely a crapshoot. You can look at a company's payout ratio, for one thing. Or look at its industry. Right now, financial companies are in a pinch, and Citigroup (NYSE: C) has reduced its dividend. Meanwhile, non-financial companies such as Intel (Nasdaq: INTC) and Caterpillar (NYSE: CAT) have recently raised their dividends considerably.
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