Value investing goes against the grain, seeking out promising companies that most investors have abandoned, and finding value where others see none. You need guts to have the conviction of a value investor -- especially when you're seeking great investments among companies that have decimated their dividends.

Any company that reduces or eliminates its dividend clearly signals to the market that it's in trouble. But look at it this way: While some companies try to conceal or deny their woes, dividend-cutters have boldly faced their troubles and taken action. Not every company that cuts its dividend will subsequently turn itself around. But in some cases, a cut can signal that management understands the situation, and has a plan for recovery.

Sizable sums
The companies within the Dow Jones Industrial Average offer some of the biggest overall annual payouts in dollar terms. They often make up a significant percentage of a company's total net income, also known as its payout ratio.

Company

Recent Yield

Total Annual Payout*

Payout Ratio

AT&T (NYSE: T)

6.4%

$9.9 billion

77%

General Electric (NYSE: GE)

2.2%

$4.3 billion

60%

Johnson & Johnson (NYSE: JNJ)

3.0%

$5.4 billion

44%

Microsoft (Nasdaq: MSFT)

1.7%

$4.6 billion

29%

Data: Motley Fool CAPS, Yahoo! Finance.
*Calculated by multiplying current dividend by shares outstanding.

While these companies keep their payout ratios within reasonable levels, high payout ratios can be a definite sign of trouble. You want a company to have enough cash left after paying its dividend to handle any other unforeseen trouble or expenses.

Even at a sober payout ratio, dividends can represent big bucks. If AT&T slashed its dividend in half, it would free up nearly $5 billion to use elsewhere within the company.

A look back
While many investors will flee any company that cuts its dividend, such reductions aren't always bad. If the rest of your research suggests a company is still strong and healthy, a dividend cut could even signal a good time to buy. Discover Financial (NYSE: DFS) and Dow Chemical (NYSE: DOW) enjoyed respective gains of 86% and 181% in the past year, following their early 2009 dividend cuts. Both companies owe their surge largely to the burgeoning economic recovery and diminishing concerns about the financial system.

Not all dividend cutters are created equal. Some are indeed in dire straits, but others will soon perform well again.

Have dividend cutters left you burned, or handed you gains? Leave a comment below and let us know!

Todd Wenning has identified 10 dividend stocks for the next decade and beyond.

Longtime Fool contributor Selena Maranjian owns shares of Johnson & Johnson, Microsoft, and General Electric. Discover Financial Services and Microsoft are Motley Fool Inside Value choices. Johnson & Johnson is a Motley Fool Income Investor pick. Motley Fool Options has recommended buying calls on Johnson & Johnson and a diagonal call position on Microsoft. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.