investing

What to do when companies cut dividends  

Don't dump equities

It's better to look for those dividend-paying stocks rather than switch to other asset classes such as bonds or money-market funds or abandon equities altogether.

"People who are in bonds or cash instruments may feel smug because their principal is holding up while stocks collapse, but that's going to backfire when the market recovers," says Bill Staton, author of "Double Your Money in America's Finest Companies."

There are good reasons not to abandon stocks: It's a bad time to sell stocks now that they have lost so much value. And when the market recovers, you don't want to miss out, Staton says.

What's more, the pursuit of dividends is still a sound investment strategy. In fact, it's arguably wiser now than ever.

"In a flat or declining market, dividend income is a way to generate returns that are difficult to capture from capital gains alone," says Thomas Forsha, a vice president at River Road Asset Management in Louisville, Ky., and co-manager of the $63 million Aston/River Road Dividend All-Cap Value Fund.

Over the long term, dividends can have tremendous power. "If $10,000 were invested in the S&P 500 in 1972, today it would be worth $208,972 if all dividends were reinvested, and only $74,547 if dividends were not reinvested," says David Grenier, president of Cutler Capital Management in Worcester, Mass.

Even so, you can't always count on companies that have maintained or increased dividends not to change course.

Management knows that positive dividend announcements are just as likely to attract investors and raise the stock price as negative ones are to do the opposite. So it's always a good idea to take a closer look at the financial information, says Mary Harris, associate professor of business administration at Cabrini College in Rednor, Pa.

"Companies that hold their dividends stable or increase them are sending a message that they are in a strong cash position," she says. "However, it's not a definite sign."

Taking the long view

More dividend cuts are likely, given the ongoing credit crunch. Companies are having hard time borrowing money, and holding onto their money improves their creditworthiness. They can't do a secondary offering of stock at current valuations. So they have no place to go except their shareholders.

"From the company's viewpoint, cutting the dividend is prudent cash management," Peter Miralles, an adviser at Atlanta Wealth Consultants, a financial management firm, says.

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