You would be hard pressed to find many investors that will cringe at the announcement of a company increasing its dividend payout. After all, dividends provide the closest thing to free money that one will ever find in the investment landscape. A guaranteed return that, albeit modest, can take away some of the fear and unease that correlates with investing.
However, for as much as dividends can appease they can also damage. One example of what they could destruct would be a company's own bottom line. For instance, by increasing dividends a company is basically guaranteeing shareholders that revenues and earnings will at least be strong enough to warrant such generosity. Still, with looming uncertainties growing thicker and thicker with each passing day, are such guarantees truly feasible?
Below are three companies that may have gone a little too far with the dividend increases so far this year.
- Nucor (NUE): The 39 straight years of dividend hikes has left the company in much better shape this year than its main competitors. While U.S. Steel (X) and AK Steel (AKS) sink near lows not seen since early 2009, Nucor has proven a much more stable investment. However, the impulse to continually increase the amount of free money thrown at shareholders has possibly left the company in a precarious situation. While U.S. Steel chopped its quarterly dividend to $0.05 in 2009, Nucor's further increases amidst an environment unfavorable for the steel sector leaves a difficult decision ahead for management. Go ahead with further dividend increases and risk damaging what are quite possibly shaping up to be already shaky earnings or halt the increase and suffer the anticipated blow to market cap. Either way, striving to appease shareholders may end up hurting both the shareholders and company in the long run.
- Macys (M): While the retail sector has provided quite a few disappointments so far this year, Macy's has been a clear bright spot. In the face of JC Penney's (JCP) eliminating their dividend and Sears Holdings (SHLD) dropping 40% over the last three months, Macy's seemingly has garnered increased control over the industry. However, does all that warrant the company doubling its quarterly dividend? Despite still only resulting in a 2.15% yield, the company may have been better off waiting for outside factors, such as the summer swoon, to pass before making the move.
- Goldman Sachs (GS): By far the strongest bank standing, the company's dividend hike from $0.35 to $0.46 per quarter in May can be well understood at first glance. Still, with the share price falling over $30 since late March and the company's stock back under $100 for only the second time since 2009, now might not have been the best time for the company to strive to give back to shareholders. Especially considering the looming tax increases set to kick in at the beginning of next year will undoubtedly leave banks as some of the hardest hit casualties.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.