First Quarter Dividend Statistics - What to Make of Them?

“March Caps Worst Quarter for Stock Dividends: S&P”

So reads the MarketWatch headline on a story that was widely distributed (I saw the story in several places). The story says:

“While March proved positive for equities, with the S&P 500 up 8.5% from February, the month also capped one of the worst quarters for shareholders, with companies slashing dividends by the most since Standard & Poor's began keeping records in 1955....Companies announced 46 dividend cuts totaling a record $42 billion in the first quarter, with the slashing expected to cut actual payments by 18% in the second quarter, the worst since a 24% decline in the third quarter of 1958, according to Howard Silverblatt, senior index analyst at Standard & Poor's. Last year [2008] brought 61 dividend cuts totaling a combined…$40.3 billion, while the first quarter of 2009 brought 44 more cuts totaling $42 billion.”

Here’s my problem with a headline like the one above, as well as the sentence that reads, “…the month also capped one of the worst quarters for shareholders, with companies slashing dividends by the most since [S&P] began keeping records in 1955.” While the facts are correct, there are implications that:

• Dividend investors suffered a disastrous quarter in Q1 2009.
• Q1 was “one of the worst quarters” because of the dividend cuts.

Neither of these implications is correct. I don’t dispute any of the facts or statistics in the story, but rather the way they were spun. Here’s my spin:

Dividend investors did not suffer a disastrous quarter in Q1 2009. While it is true that many former good dividend-paying companies cut their dividends in late 2008 and early 2009, not many dividend investors who were paying attention suffered from most of those cuts. They exited those stocks ahead of time.

Q1 was a bad quarter all right, but not because of dividend cuts. It was a bad quarter because the S&P 500 Stock Index, which is a price-only index, fell 12% in the quarter. My first point is based on my concept of the Sensible Dividend Investor. He or she is not someone who buys what used to be called “widows and orphans” stocks and sticks them in a drawer forever. Instead, Sensible Dividend Investors actively monitor their portfolios for signs of companies in trouble, dividends in peril, and the like. They don’t trade very often, because the best dividend stocks are reliable dividend payers and dividend raisers. But when a company or an entire industry is in trouble, they sell those stocks. They focus on the dividends, and if a company’s dividend prospects take a turn for the worse, the Sensible Dividend Investor takes appropriate action.

No investor could have missed the fact that the entire financial sector, particularly the banking industry, was in serious trouble last year. Although traditionally banks had been reliable dividend providers, a huge cloud settled over every bank in 2008.

Here’s an example from my own experience: Bank of America (BAC). Early in 2008, I had recommended BofA as an attractive dividend stock. But after they changed their business model completely by purchasing Merrill Lynch, I re-evaluated BofA and said it was no longer suitable for a true dividend investor’s portfolio. I sold my own shares, and saved myself from their massive dividend cut as well as their wildly gyrating stock price.

In fact, the financial sector has been dominating the stocks cutting dividends since mid-2008, and that has continued to the present. In March, financial firms accounted for half of the 12 companies cutting dividend payments in the S&P 500. And these days, when banks cut their dividends, it is usually a massive cut. In March, Wells Fargo (WFC) cut its dividend by 85% and U.S. Bancorp (USB) cut theirs by 88%. In Bank of America’s case, they cut their dividend in two stages, first in half, then by 97% to a symbolic penny per share.

But no Sensible Dividend Investor should own those stocks. Not headlined in the MarketWatch article, but far more pertinent to the attentive dividend investor, is the fact that in March, seven companies increased dividends, including a 15% hike by Wal-Mart Stores (WMT) and a 12% increase by Staples (SPLS). Other notable hikes in 2009 include Colgate-Palmolive (CL) 10% , Chubb (CB) 6%, Kimberly-Clark (KMB) 3%, and General Dynamics (GD) 9%.

Among the 40 stocks in my book 'THE TOP 40 DIVIDEND STOCKS FOR 2009', 14 have already increased their dividends in 2009, while only one has cut. Most of the others have not reached the point in the year that an increase would normally have been announced.

My second point—that Q1 was bad because of precipitous drops in stock prices—is based on the fact that Sensible Dividend Investors own stocks for their dividend flow, not for capital gains. They enjoy capital gains, of course, but if your focus is on the dividend, price movements take on significantly less importance. In fact, if you are in the wealth-accumulation stage of your life (i.e., not retired), you may embrace price drops. That is because price drops, by definition, result in higher current yields. If you are buying a stock for its dividends, the higher yield that you start off with, the better off you’ll be for the entire period you own that stock…perhaps the rest of your life.

I am not being Pollyanna here. The numerous dividend cuts in late 2008 and early 2009 hurt us all, in a sense. They amount to tens of billions of dollars that are not flowing into the economy at a time when the economy can use all the money it can get. Personally, I expect 2009 will be a difficult year for dividends: (1) The awful global economy is likely to depress profits for the majority of corporations. The smaller the profits, the less money companies have to distribute. (2) Some companies will pull back on dividends, either out of necessity (they absolutely must preserve the money) or discretion (they will preserve cash and hunker down for hard times). (3) Some companies that would normally increase their dividends may freeze them for a year or two until the smoke clears.

But dividend investing is a very long-term strategy whose success is measured over years and decades, not months or quarters. From this point of view, most of the recent dividend cuts were not relevant to Sensible Dividend Investors, because they did not occur in stocks that such investors own. In the case of financial sector stocks, my guess is that they are mostly owned now by investor/speculators who are hoping for a tremendous snap-back in prices as the economy improves and the various governmental money injections around the world begin to have an effect.

Disclosure: no positions

Comments

[pacman1947:]

David,
As a retiree, I need cash flow from investments. There are many sources, and stock dividends are valid. I choose overseas sources since the rates are better (some average over 20%), but the risks are greater (including currency risk). Your observations are correct and thought provoking. Thanks.

Apr 05 09:48 AM

[notsosmart:]

good article & right on.

Apr 05 10:01 AM

[davidma11:]

nice article. I disagree in one thing some of the bank dividend cuts were a surprise. Ex. JPM dividend cut really surprised me along with WFC. In WFC case the raised it in the last 12 months prior to cutting in a big way. I do agree dividend investors do monitor their holdings and their are plenty of companies that pay and increase their dividends.

Apr 05 11:15 AM

[football frank:]

Helloooooooooooo

terrible dividend news during the whole quarter
maybe these companies should have saved some cash for when
the economy was weaker, and they would'nt had to cut their
dividends

Apr 05 01:23 PM

[damon1leo:]

What is the consensus on Verizon (VZ) dividend?

Apr 05 05:20 PM

[greedcanbgood:]

Good article but I noticed a contradiction. On the one hand the author states (pertaining to financial stocks), “But no Sensible Dividend Investor should own those stocks.” And then goes on to say, “But dividend investing is a very long-term strategy whose success is measured over years and decades, not months or quarters.”

Look, if you need the income TODAY then the author might have a point, but if you are truly in it for the long-haul then it’s clear that financials will restore dividends to previous levels. If you think you’ll just buy then when this occurs, think again because prices will be MUCH higher than they are today. As long as you believe in the financial stocks you have and that the company will be around in the long-run you loose if you sell them now and then try to get back in later.

Apr 06 10:57 AM

[David Van K...:]

Not a contradiction, but a disagreement. I don't see how you can state with certainty that "it's clear that financials will restore dividends to previous levels." The past several months changed the game for many banks, some of whom terminated decades-long strings of raising dividends. I think that buying a bank now, that recently slashed its dividend by 80%+, on a belief that the bank will restore its dividend to prior levels in the future, is speculation. Nobody knows whether the general rule that "banks pay good dividends" is still true. It is my belief that such speculation is something that most dividend investors--such as the retiree who wrote the first comment--want to avoid.

Apr 06 01:55 PM

[greedcanbgood:]

I hear you David and I do not necessarily disagree. I’m not sure I’d buy a bank today unless I felt VERY comfortable that it will be here 2 years from now. On the other hand, if I were a dividend investor I think that it is way too early to dump a bank stock simply because the dividends have been slashed – especially if I’m in it for the long haul. Besides, if I was prudent in the first place, I shouldn’t have a tone of banks in my portfolio to begin with.

Implicit in the dividend cuts (at least from the likes of Wells and USB) is the desire to get out from under the TARP debacle. US Bank especially has a Tier 1 capital ratio that is still best in class. I would be willing to bet that many of these banks will be able to raise additional capital that may dilute dividends in the short term but will result in ultimately healthy organizations that will, over time, begin increasing them.

The earlier posted relies on that dividend income to live on and in his case, you’re spot on. You said it yourself, “Nobody knows whether the general rule that "banks pay good dividends" is still true.” Much of the market today is being governed by uncertainty and until time lends clarity it’s too soon to start supposing whether or not that’s the case. =)

Apr 06 04:48 PM