Blue-chip dividend investors aren’t happy campers these days. Their favorite financial stocks have declined significantly, and cut or omitted their dividends. The insult to injury however may come next January, when they find out that since their company didn’t make any money, they didn’t pay any U.S. Federal income taxes, and therefore, the dividends that they were paid are not dividend qualified, meaning they have to pay 35% tax on them instead of 15%. On the bright side, since dividend investors usually hold on to their stocks for decades, many of them will still show a gain over the decades, that is if the company is still around.
For the record, 138 companies decreased their dividend during the third quarter of 2008, representing a 557% increase from the 21 issues that decreased their dividend during the third quarter of 2007. Reported dividend increases fell 21.2% to 346 from 439 reported in the third quarter of 2007. It was the worst September for dividends since S&P started keeping dividend records in 1956, with 60 issues decreasing their payment. During the second quarter companies were nervous and cautious; during the third quarter they took action, and that action took $22.5 billion out of the pockets of investors.
Financial issues accounted for about two-thirds of the dividend cuts and 93% of the dollar damage during the third quarter. Also, no longer is it just blue chip companies cutting dividends, now I am seeing smaller and more regional issues. The problem has trickled down.
However many issues are still increasing their dividend rate despite the massive number of dividend cuts, and given the uncertainty of the markets and the economy, they have to be extremely confident of their future earnings and cash flow to do so – we’ll see.