Standard & Poor's recently projected that dividends on S&P 500 stocks will fall 13.3% in 2009. If that happens, it will be the steepest dividend drop since 1942.

That news is particularly painful on top of the record dividend cuts that have already taken place in the last year -- especially for investors who count on receiving their dividends to make ends meet.

But even in the face of pessimistic predictions, it's important to remember that not every stock will drop its dividend along with the market. Some, in fact, are actively bucking the trend and raising their payments. And those are the ones you want to watch.

What's the difference?
As Warren Buffett once said, "It's only when the tide goes out that you learn who's been swimming naked." When you compare the companies that are continuing and raising their dividends with the ones that aren't, it becomes fairly obvious which ones have been caught skinny-dipping.

Certainly, the economic downturn accounts for a portion of the troubles companies are feeling these days. But the magnitude of any given company's problems depends in large part in the decisions its leadership team made when times were far less rough -- especially in terms of managing cash.

Even in the best of times, it takes strong internal discipline for companies to pay dividends consistently over time. They have to be in control of:

  • Their balance sheets -- so they don't run afoul of any debt covenants or otherwise jeopardize their ability to raise capital;
  • Their profitability -- so they don't cannibalize themselves or put their growth or operations at risk by paying those dividends; and
  • Their cash flows -- so they can have the cash available when it's needed to make those dividend payments.

In the worst of times, those qualities take on even greater importance -- and companies that were faking it during good times get called out in the bad.

Of course, companies are being affected by the recession to different degrees. Industries that rely heavily on debt, like automakers, financial services, and homebuilders, have been exceptionally hard-hit by this particular recession. In those industries, merely maintaining dividends -- and continuing to support those payments with earnings -- is a minor miracle in and of itself these days.

Still, even in those industries, the companies that behaved responsibly and shepherded their cash well during the boom times are the healthiest ones today.

That's why dividends -- and dividend policies -- matter
In any line of business, the companies with long-run staying power are the ones that:

  • Consistently run efficient operations;
  • Look out for their shareholders' interests in good times and bad; and
  • Prepare for the inevitable bust that follows any boom.

In more usual times, it can be tough to tell which companies truly have that staying power. During times like this, however, what they do with their dividends speaks volumes about how well they've prepared and protected their businesses.

So what do those strong companies look like? They're the ones who:

  • Have reasonable levels of debt -- below half a year's revenues.
  • Retain enough earnings to reinvest in the company's future -- a good rule of thumb is a payout ratio below half a year's earnings.
  • Have managed to actually raise their payouts in the past year.

Companies like these, for instance:


Debt-to-Sales Ratio

Payout Ratio

Dividend Yield

Dividend Growth (last 12 Months)

Kellogg (NYSE:K)





Honeywell (NYSE:HON)





Emerson Electric (NYSE:EMR)





Sysco (NYSE:SYY)





United Technologies (NYSE:UTX)





PepsiCo (NYSE:PEP)





Hasbro (NYSE:HAS)



3. 3%


Data from Capital IQ, a division of Standard and Poor's, as of Feb. 7.

Strong financials stemming from good management before the economic meltdown mean that these companies -- and companies like them -- have excellent prospects.

Buy strength amid weakness
Only the strongest companies are really positioned to survive an extended downturn. As this mess continues to drag on, wouldn't you rather own that strength?

That's why, in good times and in bad, at Motley Fool Income Investor, we look for firms that are consistently managed with their shareholders' long-term interests in mind. A company's dividends -- and the capital structure that enables those payments -- speak volumes about how strong it truly is.

Strong firms will reward you in good times and bad -- and in bad times, it's especially important to make sure you own only the best. If you'd like to see which companies we think are the best of the bunch, you can join us today for a 30-day free trial of Income Investor. Simply click here to learn more.

At the time of publication, Fool contributor Chuck Saletta owned shares of Sysco. Sysco and PepsiCo are Income Investor picks. Hasbro is a Stock Advisor recommendation. The Fool has a disclosure policy.