That Dividend Check? No Sure Thing

Sunday, March 1, 2009

For decades, dividends have provided steady income for retirees and millions of other Americans who have bought certain stocks for their clockwork-like dividend distribution. Analysts estimate dividends made up more than 40 percent of investor returns over the past century.

Like many things in this economic crisis, dividends are going by the boards, as companies slash or suspend them to save cash.

On Friday, General Electric became the latest to do so, cutting its dividend to 10 cents a share from 31 cents, a move the company said could save up to $9 billion a year and is meant to preserve its top-shelf credit rating. Until Friday, GE was one of those count-on stocks -- the dividend cut is the first at the company since 1938.

GE -- which produces light bulbs, jet engines, wind turbines and television programming (NBC, CNBC) -- has huge commercial and consumer finance divisions. Just like every other big bank, GE's lending operations have been crushed by the debt crisis. GE shares have lost more than 70 percent of their value over the past year.

GE joins a growing list of other companies that have slashed dividends, including J.P. Morgan Chase, Pfizer, Citigroup, Dow Chemical, McLean-based Gannett, CBS and even Sandy Spring Bancorp in Olney.

Some companies have managed to raise dividends this year, including 3M, Archer Daniels Midland and Coca-Cola. BP has reaffirmed its intention to pay dividends this year.

Although dividend cuts provide bottom-line savings for strapped companies, they have at least a couple of downsides.

During a time when the U.S. economy craves stimulus, dividend cuts by their very nature are anti-stimulus. GE's dividend cut alone will take $9 billion of cash out of shareholder pockets this year. This is particularly worrisome in the U.S. economy, where 70 percent of gross domestic product is made up of consumer spending.

Secondly, the cuts can cause shareholder unrest, which can lead to boardroom coups. This is particularly true in family controlled companies where trust-fund cousins live off shrinking dividends.

-- Frank Ahrens

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