What to Do with a Dividend Freeze

Earlier in the month, we looked at reasons why to sell a dividend stock when it cuts its dividend. However, what should you do if a company simply opts to leave its dividend flat? This is happening more and more with the recent economic downturn.

The following stocks in my portfolio have frozen their dividends at the current rate per share (yields as of 10/24/08):

General Electric Co. (GE) - 6.95%
Current Dividend: $0.31/share (last 5 quarters)
Previous amount: $0.28/share (September 2007)
2007 Dividend: $1.15
2008 Estimated: $1.24
Last Chance to raise: Q4/2009

The Home Depot, Inc. (HD) - 4.86%
Current Dividend: $0.225/share (last 8 quarters)
Previous amount: $0.15/share (September 2006)
2007 Dividend: $0.90
2008 Estimated: $0.90
Last Chance to raise: Q4/2008

RBC Royal Bank (RY) - 4.41%
Current Dividend: C$0.50/share (last 5 quarters)
Previous amount: C$0.46/share (August 2007)
2007 Dividend: C$1.88
2008 Estimated: C$2.00
Last Chance to raise: Q4/2009

Until it decided to cut its dividend earlier this month, Bank of America (BAC) was also in this group. When the dividend was cut, I sold my shares.

When a company decides to freeze its dividend at the current rate per share, the first thing I do is put the stock "On The Shelf." This is a place I can set the security aside within my income portfolio with no additional purchases made until its outlook improves and it comes off the shelf, or deteriorates to the point it should be sold.

I look at dividends on an annual basis. This adds a degree of flexibility and opportunities for the company to hold the dividend flat for a period of time yet continue its string of annual increases. For example, if HD were to declare a dividend of $0.235/share in the fourth quarter of this year, it would show a year-over-year increase from 2007 ($0.91 vs. $0.90). I would then pull it off the shelf and move forward. I have listed above the last chance each stock has to increase its dividend and continue its year-over-year string.

If a company leaves its dividend flat year over year, the decision is not as clear-cut as a company that cuts its dividend. I will look at alternative investments, along with the company's current yield and future outlook. There is something to be said for a company that would not cut its dividend during difficult times.

Disclosure: Long in HD, GE and RY.

Comments

[sumosama:]

Do you reinvest dividends? If so, why would you put a GE on the shelf when you would be buying so many more shares at the current price if you do reinvest?

Good article! (Fellow 62'er)

2008 Oct 29 12:04 PM

[notsosmart:]

very important factor left out.the purchase price! if you buy a stock @ 7% yield & the dividend stays flat that will be your yield forever.if are on a drip plan & the dividend stays flat this market is great for you if the stock has gone down 30-40%.you get more stock therefoe more dividend.drip plans,$ averaging made my retirement very comfortable. some co's let you buy direct from them eliminating broker fees.if you are young & time is on your side this is the way to go.

2008 Oct 29 12:20 PM

[MichaelZZ:]

Paraphrasing Isaac: Objects in motion tend to remain in motion, objects at rest tend to remain at rest, and to change either condition, requires energy.

In this case, the energy factor should be effected by Congress by legislating the appropriate fiscal adjustments, i.e., immediately (do not wait until 2010) repeal those portions of the Bush tax legislations for those with taxable incomes in excess of $200,000 (arbitrary, i.e., could be $225M, $230M) and legislate permanent tax reductions for those with taxable incomes under $80,000.

This will be the energy factor, which will prime the engine of our economy. The longer it takes to do this, the more problematic will be the results.

A one-shot stimulus package will not work, as the recipients will pay down debt or add to savings due to insecurities, whereas a permanent tax reduction will mean that they will see their net paychecks increase and will have greater confidence. Unless consumers increase their collective confidence and spend, the situation will become much graver.

The parameters of the first traunch/tranche of $125 billion should be changed:

1) Only those institutions who want the funds should receive, i.e., none should be coerced into taking

2) The dividend rate should be changed to, at least 11%, for the purpose to stimulate the institutions to attempt to raise capital from private sources. They would know that they have the backstop of the 11% preferreds.

3) The conversion factor should be significant

4) As in the case of the Buffett purchase of GS preferreds, there should be substantial long-term warrants

5) The "fund" should be given seats on the Boards.

6) All dividends, other than any preferred stock dividends should be deferred for one year and will be re-assessed at the end of the year

7) There should be a moratorium for any bonuses and this will be reevaluated at the end of the first year

8) Those institutions which do not accept the "fund's" requirements and eventually fail, and which will have exacted bonuses will place in civil and criminal jeopardy those recipients of the bonuses. The punishments will include imprisonments and the return of the bonuses plus substantial monetary penalties.

The common shareholders will be adversely affected (much of which has already been reflected), but that is appropriate.

Capitalism will be alive and well.

Michael Z.
Sherman Oaks, Ca.
[e-mail]
818.988.2792

2008 Oct 30 02:42 PM