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Dividends are heading for the worst year in six decades. S&P estimates that dividends for the S&P 500 companies will be 13% lower in 2009, the biggest decline in six decades. 62 companies in the S&P 500 cut dividends last year, 5 times the number of those cutting in the previous 5 years. The 13% drop is considered an optimistic estimate; other estimates are predicting the decline could be as much as 20%.

Corporate profits have plunged if not disappeared entirely in recent times. Quarterly corporate profits have dropped quarter after quarter in the last two years and that trend is expected to continue in 2009. Meanwhile, borrowing costs rose (assuming money can be borrowed). Conserving money in these times has taken on a new sense of urgency. Dividend cuts follow along after the constant flow of stories about employee layoffs, salary cuts, bonuses eliminated, etc. Tuesday, JP Morgan (NYSE:JPM) cut its dividend to a nickel per quarter & US Bancorp (NYSE:USB), the last bank on the Dividend Aristocrat list, is at the top of the list for upcoming dividend cuts.

Financial companies, especially banks, are prominent on the list of companies cutting dividends and other companies are following along. In the last month, S&P 500 Dividend Aristocrats cutting their dividends include: Pfizer (NYSE:PFE), State Street Corp (NYSE:STT) and Masco (NYSE:MAS). To be included in this elite group, S&P 500 companies need a minimum track record of paying consecutive higher dividends for 25 consecutive years. General Electric (NYSE:GE), Dow stock & Dividend Aristocrat, has a 13+% yield as the market is pricing in a dividend cut despite numerous reassurances by the CEO.

The S&P 500 Dividend Aristocrat group is an excellent place to look for investments, especially in these troubled times. But extra care is needed because of the many dividend cuts that were already (or will be) announced. But in that group, as well as outside the group, many will persevere and will continue paying dividends without cuts. Last week, Coca Cola (NYSE:KO), a Dow stock and Dividend Aristocrat, which I've had in my IRA for a number of years, increased their dividend, extending their streak to 47 consecutive years of higher dividends. A long track record of dividend increases does not guarantee the future (i.e. Masco). However, when a company has a proven track record of paying dividends along with good earnings coverage, an investment should generate a profitable holding during these times. The annual yields on strong companies are considerably higher than the nominal 1% (or less) earned on money market deposits, making it easier to endure a sideways or declining stock market in the coming months.

Disclosure: Long KO.

Source: Dividends Outlook for 2009