As recently as February, General Electric Co. (NYSE: GE) had hopes of maintaining its dividend payout.
But by the end of the month, Immelt's resolve had collapsed under the weight of the global financial crisis and his company announced its first dividend cut since the Great Depression. GE slashed its payout by more than two-thirds, from 31 cents to 10 cents per share.
GE is not alone. Companies typically abhor dividend cuts, as they are widely viewed as a sign of desperation. But lean times – like those we've experienced in the past year and a half – have left even the proudest U.S. firms with little recourse.
By cutting its dividend, GE will save about $9 billion a year.
The 117-year old American icon was joined by a record number of companies that issued dividend cuts in the first quarter of 2009. Companies slashed a total $77 billion from investor payouts in the three months ended March 31. For the first time since 1955, dividend cutbacks actually outweighed dividend increases.
"While the number of dividend decreases is at a record high, the number of increases has set a new record low," said Standard & Poor's Chief Index Analyst Howard Silverblatt. "The average has been for every 15 increases there is one decrease. Now it is three increases for every four decreases."
The long list of businesses that have cut their dividends reads like a "Who's Who" of Corporate America. Bank of America Corp. (NYSE: BAC), Citigroup (NYSE: C), Motorola Inc. (NYSE: MOT), CBS Corp. (NYSE: CBS), and Pfizer Inc. (NYSE: PFE) were among the victims.
Now that even America's proudest, most-reliable labels have reduced their payouts, it's hard to tell exactly which companies will be the next to cut their dividends. But here are some simple rules to follow when looking for a safe place to invest your money for long-term dividend growth.
Three Rules for Dividend Investing
Dividends remain a critical element of investing success, Money Morning Investment Director Keith Fitz-Gerald has repeatedly said. That's especially true in the uncertain, whipsaw market conditions that have dominated since last fall.
According to Fitz-Gerald, one study by Ned Davis Research is particularly telling, noting that dividend-paying stocks provided returns of more than 10% a year from 1972 to 2005. Non-dividend paying stocks, in contrast, posted gains of just 4.1%.
Other experts say there are three rules to follow in order to identify companies whose dividend payouts are likely to remain in place – or even grow.
- History Repeats Itself: Look for companies that have a history of raising their dividend. For some organizations, dividend growth is a top priority and their track record will show that. Although GE is clearly an exception, if a company has consistently raised its dividend for decades at a time, it will likely continue to do so.
- Earnings vs. Payout: Research is key when investing in any stock. When looking at companies that offer a dividend, a good question to ask is: "What does the company pay per share versus its assets and earnings?" Dividend payouts cannot grow if a company's earnings do not grow, so check a company's earnings history.
- Black-and-Blue Stocks: Avoid stocks whose earnings have been hammered. While in today's market most stocks are beaten down, stocks valued below $10 a share are generally there for a reason.
Three Companies That Are Unlikely to Cut Their Dividend
NYSE Euronext (NYSE: NYX): NYSE Euronext is a diverse exchange group that offers a 4.69% dividend yield, making it an extremely attractive investment opportunity. While the company was hit hard during the beginning of the recession (trading at over $100 a share to a meager $25.59 as of yesterday's close), it still shows strength for long-term investment.
"," NYSE Euronext Chief Executive Officer Duncan Niedereaur said during a recent appearance on the 1,000th episode of CNBC's "Mad Money."
NYSE Euronext completed its takeover of the American Stock Exchange (AMEX) in October. And the company has seen a tremendous improvement in its overall trading activity over the past month. Its cash equity business is up 11% on a month-over-month basis, and its U.S. consolidated equity volumes were close to record levels at 12.3 billion shares. That's a 48% increase from last year, and a 12% jump from February.
Additionally, the U.S. Securities and Exchange Commission (SEC) recently had a hearing and ruled unanimously in favor of reinstating five rules against short selling following the guidelines of the former "Uptick Rule." This ruling is important to the Big Board's growth because short sellers helped drive down share prices.
The recession that's plagued the markets over the past year and a half has severely diminished trading volumes, and therefore the profits of the New York Stock Exchange. The newly established rules on short selling can only make the company stronger.
"We are a three-year-old public company," CEO Niedereaur said. "Long-term prosperity for this company is based on fairly run markets and the reinstatement of the uptick rule is a major plus for this company."
Johnson & Johnson (NYSE: JNJ): Johnson & Johnson is a strong company with a solid dividend that yields 3.51%. Its stock remains undervalued, down 23% from its 52-week high of $72.76 a share.
Johnson and Johnson is the quintessential dividend growth stock. Its dividend has grown 14.10% on average every year since 1999. A growth rate that high means the company's dividend is doubling about every five years. This has been the pattern since 1974.
Last year, JNJ's revenue was $63.7 billion, producing a net profit of $13 billion – an increase of 22% from 2007.
JNJ's most recent acquisition of Mentor Corp. (NYSE: MNT), a global supplier of medical products for the cosmetic-surgery market, gives JNJ the opportunity to compensate for a decline in its pharmaceutical sector (the unit has cut more than 900 sales jobs and is dealing with drug-approval issues).
"Mentor will become the cornerstone of a broader Johnson & Johnson strategy for aesthetic medicine – serving both consumers and medical professionals," Johnson & Johnson Chairman Gary Pruden said in a statement. "We will use our combined strengths and experience to build a market-leading aesthetic business that capitalizes on Johnson & Johnson's broad-based commercial capabilities, worldwide surgical care footprint, and clinical scientific capabilities."
The Proctor & Gamble Co. (NYSE: PG): Proctor & Gamble offers a healthy dividend of $1.60 a share, yielding 3.26%. At $54.02, its stock down 26.5% from its 52-week high of $73.57 share.
P&G is another example of a classic dividend growth stock: It has been raising its dividend for the past 55 years. For 10 consecutive years, P&G has delivered its shareholders an annual average return of 3.10%. Since 1973, dividend payments have doubled every seven years.
Proctor & Gamble offers branded consumer goods that branch off into three global markets: Beauty, household care, and health and wellness. Many common household items come from this company, such as Tide laundry detergent, baby diapers and Bounty paper towels, to name a few. During troubled times, a stock such as this is often a nice defensive play, since families are unable to do without these items.. shaving products,
"Today we reach a little more than half of the world's 6.7 billion consumers," Proctor & Gamble CEO Alan G. Lafley recently told BusinessWeek. "We want to reach another billion in the next several years, and much of that growth is going to be in the emerging markets, where most babies are being born and where most families are being formed. We see growth across our entire portfolio."
Since 61% of P&G's sales come from outside the United States, a weaker dollar is going to be a large factor in this company's success. A weaker dollar makes U.S. made exports cheaper for foreign consumers to buy. While the company is timid about its earnings and fears that business conditions may have slowed from last year, the Cincinnati-based company raised its dividend in March. From an investment-research standpoint, increasing dividends despite expectations of a decreased consumer market is typically a good sign.
News and Related Story Links:
- Money Morning News Analysis:
Is GE Next in Line for Government Bailout?
- Dividend Growth Investor:
Johnson & Johnson (JNJ) Dividend Stock Analysis.
- Johnson& Johnson:
Johnson & Johnson Completes Tender Offer For Mentor Corporation.
- Dividend Growth Investor:
Procter & Gamble (PG) Dividend Stock Analysis.
How Procter & Gamble Plans to Clean Up.
- Money Morning News Analysis:
SEC Studies Restoring Uptick Rule That Could Have Mitigated Bear Market in U.S. Stocks.
- Money Morning Special Report:
The Five Secrets to Succeed at Bear Market Investing.