Dividends Survive Despite Recession

Corporate America is fighting to conserve cash in the economic and corporate-profits recession. Not surprisingly, investors overall have been focusing on dividend cuts in 2009.

Yet 70 companies in the Standard & Poor’s 500-stock index have either started to pay dividends or boosted them so far in 2009. That exceeds the number of companies (59) that have trimmed or eliminated dividends.

To be sure, dividend increases usually outnumber cuts in the S&P 500 by a wide margin. In 2007, there were only 12 decreases to 298 increases. Even last year—a terrible one by any measure, particularly in the dividend-rich financial sector—there were 241 increases and just 62 cuts. The dollar impact of the 2009 cuts has been much greater too, accounting for $45.1 billion of lost income, already setting a new record for a full year, vs. the $5.1 billion from the 70 new or raised payouts.

The ability to maintain and even hike dividends is undeniably a sign of business and financial strength, particularly in the current economic environment. And dividends are a concrete gauge of management’s confidence in the future because raising a company's payout is a deliberate, thought-out decision, far from automatic.

Last week marked the busiest week for dividend increases in 2009 as several blue-chip companies, including IBM, Costco (COST) and Exxon Mobil (XOM), raised their payouts. Other blue chips that have hiked dividends in 2009 include Johnson & Johnson (JNJ), Abbott Labs (ABT), Southern Co. (SO), Coca-Cola (KO), Wal-Mart (WMT), Procter & Gamble (PG), General Dynamics (GD), Kellogg (K), Avon Products (AVP) and Pitney Bowes (PBI).

Over time, buying shares of solid dividend-paying companies has consistently outperformed the broad stock market. Since the end of 1979, investing in dividend-paying stocks in the S&P 500 has returned 11.6 percent a year on average, vs.10.5 percent for the overall index, and with less risk and volatility.

Comments

[prudentinve...:]

Dr. Leeb,

To complete the picture, one should note that when dividends are cut, it is usually by 60%-100% of their previous level, but when they are increased, it is usually by 3%-8%. These annual increases, when they follow a drastic cut, imply that it may well take decades for slashed dividends to return to their former nominal level, let alone their former inflation-adjusted level.

It would have been informative had you tallied the total cuts in $ and the total increases in $ for the S&P500 this year. You would have found that total cuts greatly exceed total increases, and would have titled your article "Dividends Decimated by Recession", in the interest of truth and clarity.

The wholesale decimation of dividends is another reason that equities are unlikely to recover to their former bubblesphere valuations for a very long time.

May 18 07:05 AM

[George Edwards:]

On the other hand, I think the real point here is to own those equities which have corporate cultures of raising their dividends on a regular basis, and treating a dividend cut (or failure to raise) as a strong sell signal. If the majority of your portfolio raised their dividends this past 12 months, you avoided most of the "decimation", and enjoyed an increased income, real money you can spend or reinvest.

May 18 09:15 AM

[David Van K...:]

I second the comment by George Edwards. An attentive dividend investor is not invested in the whole S&P 500, nor even in just the dividend-paying stocks of the S&P 500. Instead, he or she is invested in the best dividend-paying stocks, whether or not they are in the S&P 500, including foreign stocks.

Dividend-growth investing is a strategy that must be executed carefully over many years. Across-the-board one-year snapshot statistics on S&P 500 dividends are interesting, but not very relevant to the attentive dividend investor. The best dividend stocks must be ferretted out through stock-by-stock research. One quality of the "best" is that they raise their dividends annually. Companies only do that if they can afford to. So companies that are in financial difficulty cannot qualify as "best," because their dividends are in peril, even if they have raised them for many years consecutively.

May 18 09:50 AM

[Oz Investor:]

The Dogs of the Dow theory (and extension to the whole S&P) has been around for some time. However before dividends can become a key aspect in selection of US stocks, there needs to be a good look at double taxation of dividends. Many companies don't spend their profits wisely and should, in fact, return more to shareholders. However, there are barriers in the taxation system that prevent this from happening. Why would an investor want their dividend to be taxed once as a corporate profit, and then again on their individual return? Much better not to pay a dividend, and only be taxed once, and at a later date than to pay tax on dividend returns along the way (that's if the management of the company can invest the funds for a reasoanble return). Once these barriers are corrected, then I believe there would be many more companies offering, or increasing, dividend streams and selection of companies based on dividend income would make even more sense.

May 19 03:46 AM

[DonFurio:]

I've always liked a dividend strategy because you can then chose whether or not to re-invest.

May 19 10:20 AM

[oilsands:]

OZ, I like your comment, but doubt we'll see anything like in my lifetime, regardless of who gets elected.

I agree with prudentinvestor. Yes there are companies which have increased dividends. Probably the best record on the market is Eastman Kodak, something like 80 years of increasing returns; didn't keep people from fleeing the stock. More to the point, the returns of steadily increasing stocks are for most part still very low. Higher yield stocks are more volatile, but pay so much more.
The hare doesn't have to fall asleep.

May 19 11:18 AM

[consumerons...:]

I buy income. I love dividends. Dividends are steadily and observably raising my standard of living. Can't get enough. The bills are getting easier and easier to pay. How can anyone argue with that?

May 19 07:26 PM

[prudentinve...:]

David, George, and others,

I fully agree with, and share your philosophy of dividend investing. However, in all honesty, which of you would have predicted, two years ago, that DOW or GE or AA or PFE or BAC would slash their dividends? These are all companies that many (myself included) have invested in specifically for their once-stable dividend growth.

To get a handle on the scale of the decimation, here are a few examples of what's been happening:

(a) DOW increased their dividend in Spring 2007, and now it's been slashed back to its 1988 level.

(b) GE last increased their dividend in Fall 2007. Now it is back to its 1999 level.

(c) AA last increased their dividend in early 2007. Now it is back to its 1978 level (nominal! remember what a buck bought in '78?).

(d) AEP's dividend, slashed in 2002, then steadily increased since, until now it has regained its 1970 level (nominal !!!)

(e) NWL's dividend was slashed twice in the past six months, and is now at its 1989 level.

(f) IP's dividend was just slashed to return to its 1970 level.

(g) WY's dividend was just slashed, back to its 1988 level.

These are but a few examples. Adjust for inflation, and the picture gets uglier. While some stellar names mentioned in this article have increased their dividend, they are the exception, not the rule for 2008/2009, and the dividend slashing party may be just beginning. Additionally, there is no guarantee that some of these very companies will also cut when they find that their yields are much higher than their peers.

Yes, dividend investing is the way to go, but dividend cutting has gained momentum to an unprecedented extent in 2008/2009, and the title of this article would lead you to believe otherwise.



On May 18 09:50 AM David Van Knapp wrote:

> I second the comment by George Edwards. An attentive dividend investor
> is not invested in the whole S&P 500, nor even in just the dividend-paying
> stocks of the S&P 500. Instead, he or she is invested in the
> best dividend-paying stocks, whether or not they are in the S&P
> 500, including foreign stocks.
>
> Dividend-growth investing is a strategy that must be executed carefully
> over many years. Across-the-board one-year snapshot statistics on
> S&P 500 dividends are interesting, but not very relevant to the
> attentive dividend investor. The best dividend stocks must be ferretted
> out through stock-by-stock research. One quality of the "best" is
> that they raise their dividends annually. Companies only do that
> if they can afford to. So companies that are in financial difficulty
> cannot qualify as "best," because their dividends are in peril, even
> if they have raised them for many years consecutively.

May 19 09:38 PM

[Ricard:]

Great comment - it could be its own article, and yes, I agree more with the conclusions in your comment than the article itself.

On May 19 09:38 PM prudentinvestor wrote:

May 20 04:10 AM