Dividends: Waiting for a Rebound

It turns out that not all dividend-paying companies have gotten stingy. Cardinal Health (CAH) boosted its payout 25% on June 2—to an annual rate of 70¢ per share from 56¢—a welcome reminder that, despite the recession and financial crisis, some companies are finding ways to be more generous to shareholders.

Dividend-focused investors needed the reminder after a rough year for those who depend on income from quarterly payouts. This quarter, payments by companies in the Standard & Poor's 500-stock index are down 20% from a year ago, according to S&P.

Investors accustomed to regular dividend growth have seen major sectors, especially financials and consumer discretionary, cut payouts to the bone. Meanwhile, in healthier sectors, "the increases are much fewer and smaller," says S&P senior index analyst Howard Silverblatt.

Fallen Aristocrats Likely

So far in 2009, 80 companies in the S&P 500 have raised dividends, netting shareholders an extra $5.4 billion, S&P says. However, 63 firms have reduced payouts, for a $46.3 billion hit to dividend income. (S&P, like BusinessWeek, is a unit of the McGraw-Hill Companies (MHP).)

Investors have been disappointed by some of the stock market's most consistent and generous dividend payers. S&P keeps a list of "Dividend Aristocrats," firms that have increased payments for 25 consecutive years. Changes to the list won't be official until the end of 2009, but many aristocrats seem to destined to lose their rank.

Of 51 aristocrats in the S&P 500, nine haven't increased their dividend since 2007. They include Avery Dennison (AVY), Johnson Controls (JCI), Leggett & Platt (LEG), and M&T Bank (MTB).

Supervalu Raised Its Payout

Several aristocrats actually cut payouts this year, including General Electric (GE), Gannett (GCI), Pfizer (PFE) and US Bancorp (USB).

Other firms are holding onto their aristocratic designation with the tiniest of increases. Supervalu (SVU) increased its dividend 1.45% in May.

But some companies, even in hard-hit sectors, have managed to boost payouts. Lowe's Companies (LOW) raised its dividend 6% in May despite its exposure to the U.S. consumer and slow housing market. Johnson & Johnson (JNJ) upped its payout 6.5% in April, and Abbott Laboratories (ABT) raised its dividend 11% in February.

Finance Firms Hard Hit

"There are some very sound companies, with rock-solid balance sheets [paying high dividends]," says Robert Siewert, portfolio manager at investment management firm Glenmede. He owns Procter & Gamble (PG), the consumer staples giant that raised its dividend 10% in April.

Dividend cuts have been most severe in the financial sector. Scott Schluederberg, a portfolio manager who runs a dividend strategy at Hardesty Capital Management notes dividend cuts were often a condition of federal bailout funds, even at firms like JPMorgan Chase (JPM), which might otherwise have avoided a payout reduction. "That was a difficult period to navigate through," Schluederberg says of the wave of financial dividend cuts earlier this year.

Financial payouts have fallen so far so fast that "there's not much further for them to go at this point," says Dan Genter, who manages dividend-focused funds at RNC Genter.

Health Care Looking Flush

According to S&P, the financial sector made up 29% of S&P 500 dividends at the end of 2007, but makes up only 9% now.

That makes it more difficult to find financial stocks that pay healthy dividends, even if, Genter says, "We'd still like to have some financial ownership." With bank payouts so low, he has focused on dividend-paying insurance companies and other nonbank financial stocks.

In the health-care sector, by contrast, dividend increases are far more common, as demonstrated by Johnson & Johnson, Abbott Laboratories and Cardinal Health. For health-care firms, "cash flow is going to stay relatively stable," Genter says.

Recovery Could Lift Payouts

As with many trends in the stock market, much depends on whether the economy can recover in late 2009 and 2010. S&P's Silverblatt says many dividends are "on thin ice" and could be cut in August or September if companies are pessimistic about the coming year.

In the economy rebounds, however, companies can afford to be generous to shareholders. Now that so much dividend cutting has already taken place, investors might actually start to see their income from equities rise again.

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