Dividends Are Still Very Much Alive

With all of the dividend cuts of the last 18 months, many pundits are sounding the death knell for the dividend. There are lots of reasons they give:

1. Companies can't afford them anymore
2. They complicate capital adequacy and flexibility
3. The capital they represent is too hard to raise
4. Obama tax hike will make them less attractive to investors

The arguments that dividends are a relic of the past or a fatality of the credit crunch are silly. The recession we are crawling through will not last forever, and when it ends, companies will once again reinstate most of the dividend cuts as soon as they are able.

The reason is simple: almost all of the companies that have cut their dividends by any significant amount have faced a hornet's nest of angry shareholders. In addition, it is hard to find a company whose price is higher after a dividend cut. Indeed, in most cases, if a company has cut its dividend, it has been hammered.

According to Bloomberg data, dividends are very much alive. Bloomberg shows that of the 500 stocks in the S&P Index, 362 currently pay a dividend. During the past twelve months, 94 companies reduced their dividends, 115 paid the same amount as last year, and 130 raised their dividends. Thus, in a year when the headlines have been full of dividend cuts, there were actually more dividend hikes than cuts.

The median dividend hike for the 130 companies that raised their dividends during the year was about 6%. Importantly, the median total return of these companies outperformed the S&P Index by nearly 8%.

There are still many great companies that are quietly raising their dividends and in doing so, reconfirming their commitment to give back to their "owners" a fair cut of the profits.

As I have said before, the root of the word dividend is dividere, which means to cut or divide. Dividends are not a bonus or a gift; dividends are the shareholders' cut of the profits. Corporate managers who ignore this may find themselves looking for a new job.

The linchpin that best ties the interests of corporate America together with its shareholders is a consistent and intelligent dividend policy. Most shareholders understand that recessions mean lower earnings and dividends. But, in my judgement, the pundits are wrong if they assume that shareholders will be less interested in dividends after the recession than they were before. I think it will be just the opposite.

Comments

[Dave Shafer:]

Great article. As someone who has, of late, came to the realization that, "become financially independent solely from allocating capital and building a dividend machine I can tell you that during these difficult economic times dividends and reinvesting them has never been better," it is good to know that there is a strategy that seems to work well in bear markets and even recessions!

May 15 08:47 AM

[Living4Divi...:]

Great article!

"With all of the dividend cuts of the last 18 months, many pundits are sounding the death knell for the dividend. There are lots of reasons they give:
1. Companies can't afford them anymore
2. They complicate capital adequacy and flexibility
3. The capital they represent is too hard to raise
4. Obama tax hike will make them less attractive to investors"

I love reason #1. "Companies can't afford them anymore" If a company says this during GOOD times, then company is no longer capable of enriching shareholders - so why bother investing in it? I agree with you "Dividends are not a bonus or a gift; dividends are the shareholders' cut of the profits."

There is a difference between the companies stated reasons in good times and during recessions: During Good Times, your reasons #2 & #4 are most often stated.and are valid reasons.

Here Are The REAL Reasons (In addition to above)
5. Management claims they can invest your money better than you can. Management wants to grow the company thru capital projects and/or acquisitions and need the money to fund acquisitions (for example: Pfizer)
6. Management's salaries are based on revenue. The larger the company's revenues and the larger management's compensation.
7. Most managers are compensated with stock options. The higher the stock price, the more valuable the stock options. By spending shareholder money (your money) on stock buybacks management raises their compensation.

The secret that no one wants you to know: in some companies share buybacks have equaled stock options issuance. In essence, the earnings of the company are used to reward the managers of the company. Shareholders get the shaft. Item #7 was a big problem in past times, but is being resolved by issuing dividend-paying restricted stock in lieu of dividends.

May 15 10:02 AM

[Living4Divi...:]

One final unspoken reason:
8. We wanted to cut dividends anyway, because management wanted to go on an acquisition spree (for example, Pfizer) - so we will use the following rationale "Everyone else is cutting dividends, so we can do the same and blame it on tough times."

May 15 10:08 AM

[Rising Divi...:]

Amen,Amen

These are just excellant additions to my list. As I have said before, I am not a great fan of share buy backs. Too often, they are just making up for the stock option give aways. We dividend investors are by nature long-term investors. As each of us is doing our own research, let's post something on this website when find a company that is giving away the store via stock options. I think we can raise a ruckus.

May 15 10:56 AM

[notsosmart:]

i had a 7.2% yield last year.i will take that any year(growing with the coming inflation).it was based on drip plans in good cos over many years.trade,trade,trade, the new wall st mantra is not the way to go.long term investing in good div payers is the answer as you can $ average & save a lot of fees. wall st cant sell phony rated AAA paper anymore so they have to push trades.its all ponzi so be careful.

May 15 11:28 AM

[consumerons...:]

" Buy and hold is dead!", they cry, "this rally can't last!" And like lemmings they race to the phones to "take some profits" before too many of the others do the same thing. Naturally, any upward price momentum slows and they think that proves their point.
They're doing us a favor. Their silly behavior will keep knocking prices back down every time they increase the least little bit, which, of course will help keep dividend yields from falling too much.
Is it really this simple? Gosh, I don't know. I sure hope so. And I hope they keep it up.

May 28 09:43 PM