MARKET BUZZ
Safety or Illusion? Dividends in a Downturn
|
TOOLBOX
   Resize
COMMENT
 Discussion Policy
 CLOSE
Comments that include profanity or personal attacks or other inappropriate comments or material will be removed from the site. Additionally, entries that are unsigned or contain "signatures" by someone other than the actual author will be removed. Finally, we will take steps to block users who violate any of our posting standards, terms of use or privacy policies or any other policies governing this site. Please review the full rules governing commentaries and discussions. You are fully responsible for the content that you post.
Who's Blogging  |
Call it the dividends dilemma.
As stock prices plunge, many companies start looking attractive to investors for their rising dividend yields. But wait: Many of those same companies are struggling -- their profits in danger, their cash drying up -- and they may have to chop their dividend payouts.
The numbers point to the dilemma. The average yield for companies in the Standard & Poor's 500-stock index is higher than it has been in decades, topping 4 percent, according to Howard Silverblatt, S&P's senior index analyst. Meanwhile, the number of companies that cut dividends in the third quarter soared 557 percent year over year. September alone was the most active month ever for dividend reductions since S&P began tracking them in 1956.
Still, Silverblatt pointed out, many companies that offer decent yields continue to pay dividends and increase them. Dividend-paying stocks typically provide income and safety for investors. Experts say they also make sense during periods of market turmoil, but, given the degree of economic uncertainty now, they must be chosen with care.
Josh Peters, editor of Morningstar's monthly newsletter DividendInvestor, considers dividend-paying stocks exactly what he'd want to own through a recession. The companies he favors, while not absolutely recession-proof, tend to operate in businesses that provide the essential goods and services required no matter the state of the economy: utilities, pipelines, food and beverages, health care.
Merrill Lynch said in a recent report that it looks for companies that consistently increase dividend payouts and boost their cash levels as a percentage of assets over at least a three-year period. "We have found that trends in these factors make dividend yields more believable," the report said.
Silverblatt warned investors to carefully investigate any company with a high dividend yield. Noting the level of risk in the market, he encouraged investors to find companies that are easy to understand -- those that generate a steady flow of cash from current production. "If you're looking for dividend income, you need to do your homework and rid yourself of the old idea that some things are always safe," he said in an interview.
-- Steven E. Levingston
