Dividends disappearing so fast my head is spinning!

[audreyh1]

Wow!

A couple of days ago, JP Morgan Chase cuts their dividend from 38 cents to 5 cents a share, even though they are well capitalized and in no danger. They decided it was prudent to hoard cash.

Several companies slashed dividends today.

I see the flood gates opening. I suspect that now it is "politically correct" to slash the dividend and a lot of companies are going to do that justifying it by stating that they are being prudent to hoard cash. I always suspected that may company executives hated paying dividends anyway (they'd rather spend the money on the company and line their pockets than give it back to shareholders) - so now they have cover to reduce them severely.

Anyone living off a stock dividend income must really be hurting. (They probably were already hurting since that strategy tended to be high in financial stocks which have already been slashed).

Are stock dividends going the way of the dinosaur? I never imagined seeing this happen in my lifetime.

Audrey

 

[bssc]

My understanding is that there are restrictions on what they can pay since they have taken TARP money. The treasury statement is here but I am not quite sure what the restrictions are.

 

[yakers]

Are stock dividends going the way of the dinosaur? I never imagined seeing this happen in my lifetime.

Audrey

Actually they may becoming more important. I will be paying a lot of attention to dividends now that I have retired. I know that a lot of folks go by total return but I like dividends.

 

[CyclingInvestor]

Anyone living off a stock dividend income must really be hurting. (They probably were already hurting since that strategy tended to be high in financial stocks which have already been slashed).

Are stock dividends going the way of the dinosaur? I never imagined seeing this happen in my lifetime.

Audrey

I am retired and living off the dividends of my 100% individual stock portfolio.

I have been fortunate enough to see only dividend increases. I did have 3 financial stocks, but sold 2 in 2007 and GE in late 2008 after deciding that their assets could no longer be accurately valued, even by them.

I do not think that financially strong businesses that throw off alot of cash on a consistent basis are going to change their dividend culture. I would be very surprised if JNJ / PG / KO etc reduced their dividends unless economic conditions get much worse than they are today.

 

[mathjak107]

we had this discussion a few times put i still dont see the merit in "dividend paying stocks" in the first place.

anything that gives me something and takes it away in the form of a price per share reduction isnt a benefit.

imagine the bank paying you interest then reducing your principal by the same amount. thats exactly what happens when a stock pays out its dividend, the next morning the price is automatically reduced by the payout amount.

people felt more comfortable i guess getting some money from a company because it was a sign the company still had money to give you but overall it really dosnt make much sense... you can sell off 5% a year of anystock on your own .

when share prices were rising and burying the fact the payout was reducing your share price no one payed attention as to how much more the appreciation might have been if part of it wasnt simply just recovering from what was payed out.but now the real effect of giving away the company every quarter is making it show itself

i guess going back to the great depression people were very distrusting of stocks and so they were more comfortable with companies paying out their profits quarterly rather then building up the company assets . so those stocks based on certain studies tended to do better but i think it was alot of the emperors new clothes as even today people look at a dividend like bank interest and never even realize they are having their per share price cut by the same amount they just got automatically by the exchange computers the next morning before the open..


want me to think of the dividend as as a bonus? dont take it back with the other hand reducing my stocks value by that amount... aaaah good trick!

 

[daloanboy]

Well its like this.

A company can either pay out cash to its shareholders or retain it to invest in its business.

If a company has fantastic investment opportunities it makes sense to retain earnings and invest in the business, acquisitions etc.

Most companies do not have fantastic investment opprtunities.

The cash they retain is squandered on executive excess, stupid acquisitions, idiotic products, unintelligent expansion abroad etc etc.

So, far from enhancing the asset base of the company, retained earnings often have no or negative impact on the assets.

So, it's far better, in many cases, for you to take the money and decide whether to invest in a company you like or buy some baked beans for lunch.

Diviends are also less volatile than share prices. So you don't get quite so many dividend posters fretting about their portfolio values.

Oh and you also don't have to worry about SWR. You just live off your dividend income.

 

[mathjak107]

but its still a wash.... get a dollar in a dividend, subtract a dollar off the stock price.... im not debating which hands are better for holding corporate money these days ,im only saying its a non event , your not getting a "bonus" with a dividend pay out.. you still have exactley the same amount of net worth after the payout... bank interest you are up by the interest payout plus what you had before the interest was payed out..

so many times i see folks go "the stock pays a 5% dividend while i wait for it to come back"

it should say the stock gives you back 5% of your principal while you wait

 

[Gpond]

My understanding is that there are restrictions on what they can pay since they have taken TARP money. The treasury statement is here but I am not quite sure what the restrictions are.

.01 per share, per quarter.

 

[Lakedog]

.01 per share, per quarter.

This is true for the banks that took the second round of TARP funds, but there were no restrictions related to the first round.

 

[daloanboy]

it should say the stock gives you back 5% of your principal while you wait

Not so. Were it so you would expect (higher) dividend stocks to increase less, or decrease more, than non (higher) dividend paying stocks.

Research shows the opposite to be the case.

 

[ziggy29]

so many times i see folks go "the stock pays a 5% dividend while i wait for it to come back"

it should say the stock gives you back 5% of your principal while you wait

Of course, if you're reinvesting dividends, you might say "I got 16 extra shares through reinvested dividends this year when I got only 11 last year."

Half empty, half full.

And yes, it's a taxable event in a taxable account. But at least for 2009 (and probably 2010) the dividends are capped at a 15% rate and the taxable amount is added to your cost basis, which will "come back" to you when you sell. Dividend investing in a taxable account will be a harder approach to justify if they are again taxed as ordinary income down the road, but we're not down that road yet.

 

[HFWR]

Oh and you also don't have to worry about SWR. You just live off your dividend income.

You might, however, have to worry about having a larger portfolio, assuming you want to leave your principal intact, or finding "low risk", high dividend-paying stocks, somewhat of an oxymoron...

 

[Zathras]

Financial dividends have been getting hit hard this year.
However, more of my dividend payers have increased this year than have been cut. Coca Cola just raised theirs 8% this week.
This dividend investor is very happy and confident in the current environment.
Mathjak, if you sell 4% of your portfolio each year how much do you have left?
If I take my dividends, and don't reinvest them I still have the same sized portfolio I did at the beggining of the year. You don't. Diversification is still very important (maybe more so), but the method is sound and has worked for many people over the years.
The return of the dividends makes up for the accounting adjustment done each ex-date.

 

[Zathras]

You might, however, have to worry about having a larger portfolio, assuming you want to leave your principal intact, or finding "low risk", high dividend-paying stocks, somewhat of an oxymoron...

This is a great point and very true in most times.
You also need to be able and willing to do research into a number of individual companies. Some people can't or don't want to take the time, which is fine, it just means dividend investing isn't for them.
It isn't for everyone, but it is a very valid method for those who have the time and inclination.

As for high yield - low risk, they are rare, but right now you can find a few.
JNJ, KFT and PG are all paying north of 3% (KFT is almost 5%).

 

[ziggy29]

Financial dividends have been getting hit hard this year.
However, more of my dividend payers have increased this year than have been cut. Coca Cola just raised theirs 8% this week.
This dividend investor is very happy and confident in the current environment.

I think it just once again points out the importance of a dividend portfolio that's properly diversified around a lot of different sectors. In particular, "safe" recession-resistant areas like consumer staples work well (such as Coke). Notice how these "safe" recession plays never get those nosebleed dividends north of 5-6%? The market's not stupid. Not perfect, but not stupid. It trusts the security of these dividends, and in this environment with pitiful yields on assets, it's not going to price a "safe" dividend to yield more than that in the vast majority of cases.

When a stock is priced to yield more than 5%, my Spidey sense starts to tingle. When it hits north of 6-7%, the market is sending a very clear signal about what likely (not certain) to happen to either the company's performance or the dividend. In general, I don't trust dividend plays with yields higher than that. People simply chasing yield in the last year chased the financials and got horribly mauled in the process.

But there are a lot of solid companies in diverse, recession-resistant industries that are paying 3-5% today and look like they can continue to do so barring total meltdown. These are the ones I tend to seek.

 

[CyclingInvestor]

You might, however, have to worry about having a larger portfolio, assuming you want to leave your principal intact, or finding "low risk", high dividend-paying stocks, somewhat of an oxymoron...

There are plenty of companies which have raised their dividends an average of 5-10% or more per year for a quarter to a half century or more and are financially sound. This keeps you well ahead of inflation, so your principle (in terms of dividend generating ability) keeps increasing each year even while you are taking out all of your dividends to live on.

I am not saying this method beats total return investing. I am saying it allows me to sleep better, however.

 

[HFWR]

I think there's merit to the dividend method, but was pointing out that Firecalc and the 4% rule assumes the spending down principal.

 

[mathjak107]

Financial dividends have been getting hit hard this year.
However, more of my dividend payers have increased this year than have been cut. Coca Cola just raised theirs 8% this week.
This dividend investor is very happy and confident in the current environment.
Mathjak, if you sell 4% of your portfolio each year how much do you have left?
If I take my dividends, and don't reinvest them I still have the same sized portfolio I did at the beggining of the year. You don't. Diversification is still very important (maybe more so), but the method is sound and has worked for many people over the years.
The return of the dividends makes up for the accounting adjustment done each ex-date.

...

you have to imagine we would be comparing a 4% dividend paying company to a company that say rose 8% in value because they havent payed out a dividend worth 4% of net asset value and grew the same 4% as the dividend paying company... its theoretically the same.... my non dividend paying stock rose 8% and i pulled 4% vs the divident paying stock rising 4% because it payed out 4%

 

[mathjak107]

Even easier to see.. you have 1 share of xyz at 1.00 .. it rose 4% and is now 1.04... they pay a 4% dividend.... you get .04 and your share is 1.00 now


the none dividend paying stock was 1.00 and did not pay out a dividend and also rose
and is now 1.04.... i could sell the same 4 cents off and have the same thing

 

[ziggy29]

Even easier to see.. you have 1 share of xyz at 1.00 .. it rose 4% and is now 1.04... they pay a 4% dividend.... you get .04 and your share is 1.00 now

True, if you assume zero long-term growth in the company. High dividend payers do tend to grow more slowly -- which makes sense, since if the company was growing rapidly they'd be more likely to reinvest profits into the business rather than subject them to double taxation -- but they do tend to have EPS growth over time.

If there's no growth -- if EPS remained flat over time and dividends were never changed -- you'd basically have a 4% bond in perpetuity with added stock market risk. Not a particularly enticing investment. But add in just enough long-term EPS growth to allow continued dividend increases (to at least match inflation) and a little bit of share price appreciation over time, and you have a much better investment.

 

[FinanceDude]

There are a few companies, like the old Phillip Morris that grew a lot AND paid heavy dividends, but those are a dying breed, as most "old school" dividend stocks got on the frothy growth bandwagon.........

 

[FIRE'd@51]

A couple of days ago, JP Morgan Chase cuts their dividend from 38 cents to 5 cents a share, even though they are well capitalized and in no danger. They decided it was prudent to hoard cash.

I don't think they are "hoarding cash". Jamie Dimon said he wanted to repay the TARP money (which he was forced to take BTW even though JPM didn't need it) as quickly as possible. I'm sure the board figured this was the easiest way to raise capital without further diluting the current shareholders.

 

[audreyh1]

Well, I am very very glad to be told that the dividend investment strategy is still working for those of you who are using it. It had seemed like an appealing strategy until this past year when so many dividends were slashed. Personally, I never wanted to deal with holding individual stocks and that seemed like the only way to really take advantage of that strategy.

But I thought the dividend slashing was spreading beyond financials and this was my concern. Textron slashed their dividend yesterday.

Audrey

 

[Running_Man]

http://www.valueline.com/dow30/f1899.pdf
http://www.valueline.com/dow30/f2084.pdf

Dividends are not an inhibitor of value by forcing a taxable event. Dividends have historically been the greatest return of the total market return. Investing in companies for their dividends for me is far easier than investing on the basis of their earnings, because it is remarkably easy for companies to manipulate their earnings any way they want. Dividends are real cash and to pay real cash is needed forcing a discipline on corporate executives.

Look at the 2 stocks discussed here. JP Morgan and Coca Cola- the 2 companies cannot be more different as an investment for their dividends. Yet both in 2008 paid $1.52 annually in dividends though a review of the history and prospects of the companies would lead one easily to the correct decision of which company to invest in for the future of dividend income in a retirement.

Coke has always earned it's dividend and is paying out about 40-50 percent to shareholders. There is nothing at present in it's business to show this is in jeopardy. It has the highest financial and safety ratings and their earnings are very predictable. In the late 90's investors went crazy and gave this stock a 50PE and a .6% dividend, not because Coca-Cola had unbelieveable options but because investors outlook was insane. Earnings have grown 6.5% over the last 10 years. Coca Cola has one of premier name brands in the world that cannot be easily duplicated.

JP Morgan on the other hand has had no clear dividend policy, they are relatively low in Financial Strength, they have had 3 years so far this decade where they did not even earn their dividend and were estimated to only earn a trifle more than the dividend this year. Dividend growth had averaged only 1.5 % over the past 5 years and for 6 years in the past decade they did not raise the dividend at all. Earnings are very unpredictable and unreliable and earnings have shown only 2 percent growth in the last decade. The government is deciding how their business should be run and how much they can pay their executives. For that reason they want to get out of TARP as fast as possible.


I view Coke as my partial business, with as with all my dividend stocks I expect a percentage of the earnings as a payout to share in the rewards and growth of the company. This is a Benjamin Graham basic tenet, and as a matter of fact for defensive investors he advises limiting yourself to dividend paying stocks.

There are plenty of stocks that with diligent care can provide for a nice dividend portfolio. The best part about dividends is when all the growth investors decide your dividend company is really a growth company and the stock price soars during good times, you can sell to move to another company that provides greater dividends dollar for dollar while still maintaining higher than inflation dividend growth.

I have never found a time when there are not dividend stocks that meet my criteria and yield at least 2 percent with dividends growing faster than the inflation rate. My short list just from the Dow 30 is JNJ, PG, UTX, MCD, XOM, KO. The other 24 for one reason or another do not make the cut for me. Other good dividend prospective companies I follow include PEP (pepsi), BFB (Brown Forman makers of Jack Daniels), for some smaller companies there is HWKN (Hawkins maker of specialy chemicals), NVO (Novo Nordisk maker of insulin and other diabetes care products that just fell into my dividend range) or perhaps UGI a solid growing utility.

It is best to maintain a list of stocks that meet a dividend criteria, follow the holdings and switch when something occurs in a holding that is not expected. Examples of this include not raising a dividend when expected, dividends as a percentage of earnings is climbing too high, earnings becoming less predictible, reduction in companies financial rating (I use value line as they are far quicker to change than any "official" ratings companies, which get mired in politics with executives).

I don't think dividends will be going away any time soon, but many companies who do not have earnings to support are and will be forced to cut them. The recent stock market decline has brought many of these to values not seen in quite a while for them.

I do want to point out that one of the worst performing "indexes" has been DVY, the "dividend achievers". Far from being a passive index, this is rather a low-expense investing scheme which was a rag-tag collection of the highest paying dividend stocks with investing rules that end in the absurdity of selling after the dividend is cut. Well at that point most of loss in that stock has occurred. JP Morgan, Pfizer, (soon to get GE booted I think),the list goes on and on and was at one point almost 50 percent in the financial sector. By the time this mess is done it will probably own almost no financial stocks. Since it's inception in 2003 it has seen it's price fall by 40 percent.

 

[audreyh1]

Wow - excellent post Running_Man! Thanks so much for providing the details. I didn't see how you guys could navigate through these horrendous times, but I think you have explained exactly how you manage it.

And, I was well aware that the mutual funds and ETFs such as DVY that had attempted to implement a dividend income strategy ended up way overweighted in financials and have been brutalized by recent market behavior, so I thought that was pretty much inevitable for dividend investors. Thanks for correcting me.

Audrey