Dividends Are Still the Linchpin

Thursday, May 14, 2009
Dividends Are Still the Linchpin

With all of the dividend cuts of the last 18 months, many pundits are sounding the death knell for the dividend. There are lots of reasons they give:

1. Companies can't afford them anymore
2. They complicate capital adequacy and flexibility
3. The capital they represent is too hard to raise
4. Obama tax hike will make them less attractive to investors

The arguments that dividends are a relic of the past or a fatality of the credit crunch are silly. The recession we are crawling through will not last forever, and when it ends, companies will once again reinstate most of the dividend cuts as soon as they are able.

The reason is simple: almost all of the companies that have cut their dividends by any significant amount have faced a hornet's nest of angry shareholders. In addition, it is hard to find a company whose price is higher after a dividend cut. Indeed, in most cases, if a company has cut its dividend, it has been hammered.

According to Bloomberg data, dividends are very much alive. Bloomberg shows that of the 500 stocks in the S&P Index, 362 currently pay a dividend. During the past twelve months,

• 94 companies reduced their dividends,
• 115 paid the same amount as last year, and
• 130 raised their dividends.

Thus, in a year when the headlines have been full of dividend cuts, there were actually more dividend hikes than cuts.

The median dividend hike for the 130 companies that raised their dividends during the year was about 6%. Importantly, the median total return of these companies outperformed the S&P Index by nearly 8%.

There are still many great companies that are quietly raising their dividends and in doing so, reconfirming their commitment to give back to their "owners" a fair cut of the profits.

As I have said before, the root of the word dividend is dividere, which means to cut or divide. Dividends are not a bonus or a gift; dividends are the shareholders' cut of the profits. Corporate managers who ignore this may find themselves looking for a new job.

The linchpin that best ties the interests of corporate America together with its shareholders is a consistent and intelligent dividend policy. Most shareholders understand that recessions mean lower earnings and dividends. But, in my judgement, the pundits are wrong if they assume that shareholders will be less interested in dividends after the recession than they were before. I think it will be just the opposite.

More on this topic (What's this?)
The Top 40 Dividend Stocks for 2009 book review (Dividend Growth Investor, 5/15/09)
Dividend Portfolios – concentrate or diversify? (Dividend Growth Investor, 6/17/09)
The Latest In Dividend Research (Disciplined Approach to Investing, 5/24/09)


http://risingdividendinvesting.blogspot.com/2009/05/dividends-are-still-linchpin.html