investing

What to do when companies cut dividends  

"If a company is highly leveraged and then suffers an economic slowdown in which earnings are impacted, it's going to have to use too much of its meager earnings just keeping up with the debt payments, and that will squeeze out the dividend," he says.

Consider other possible causes for dividend reductions. The financial sector, for instance, has been unusually hard hit by dividend pullbacks. This is largely because institutions that receive federal bailouts are required to use the extra funds for lending while reining in dividend and other payouts.

Predicting cuts before they happen

Another important consideration is whether the company has a sustainable business model or one with a strong recurring revenue stream that's relatively recession-proof.  Schluederberg prefers companies that offer services that people need rather than those that require "big-ticket, discretionary purchases which most consumers can put off."

Sophisticated investors can further look into analysts' earnings expectations. Even if you can find them, opinions may vary widely.

If possible, try to get a sense of not just its present net income to determine if the company can pay its next dividend, but its anticipated future earnings, an indicator of the sustainability of dividend payments going forward, says Jonas Elmerraji, a portfolio manager in Hagerstown, Md., and editor of The Rhino Stock Report.

Not that such diligent research is always necessary. In many cases, dividend reductions can be easy to predict.

"A dividend cut usually doesn't come out of the blue but as the last in a sequence of bad news," says Walt J. Woerheide, the Frank M. Engle Distinguished Chair in Economic Security Research at the American College in Bryn Mawr, Pa. "If you read in the news that your company just reported losing $2 billion, you can expect it to trim or eliminate dividends very soon."

Woerheide urges investors to be aware of two rules of thumb about dividend distributions:

1. Dividends are almost always paid on a set schedule. If a payout is late, it's a signal of a potential problem.

2. Most dividend-paying companies increase their payouts once a year and usually at the same time each year. If that date passes and the dividend doesn't grow as much as usual, that may signal a cut.

Keep a sense of perspective

Be careful not to lose perspective. The number of companies that pay dividends has actually been shrinking for decades, says Yixin Liu, assistant professor of finance at the University of New Hampshire. Back in 1980, 64 percent of U.S. public companies offered dividends, but 25 years later only 41 percent did, she says. That might sound bad, yet the total dollar amount of dividends has been rising.

advertisement
replacecontent-tcm:8-121790

"The headlines make it sound like everybody is cutting dividends, but that's not the case," stresses Roger Young, an analyst and portfolio manager at Miller/Howard Investments in Woodstock, N.Y.

Indeed, while 485 U.S. companies slashed their dividends last year, 1,744 raised theirs, according to Capital IQ, a division of Standard & Poor's.

          Connect with us
advertisement
CD & INVESTING NEWSLETTER

Learn the latest trends that will help grow your portfolio, plus tips on investing strategies. Delivered weekly.

CDs and Investment

How should my teen invest $150K?

Dear Dr. Don, My son will turn 18 years old in December. He has $150,000 from a settlement now sitting in the bank. What is the best plan to pursue for investing this money? Is investing in precious metals a good way to... Read more

advertisement

Blog

Dr Don Taylor

Earnings season, investing and you

Should individual investors try to anticipate financial results in an earnings report?  ... Read more

Partner Center
advertisement

Connect with us