When Unisys Corp. and Chase Manhattan Corp. announced last quarter that they were cutting or suspending their dividends, they joined a growing number of companies struggling to regroup their resources and stave off the effects of the recession.
While clearly not a good thing, cutting or suspending a dividend doesn't necessarily spell doom for a company.
"In some cases it's a good sign," said Ann Rock, vice president of Sigma Management Services Inc. in Grosse Pointe, Mich. "For some companies it's a way to improve because they are redirecting their funds back into the company."
However, cutting or suspending dividends is rarely a good sign to investors. At minimum it could be a further sign that you've bought into a stock loser. And for those who hold dividend-paying stocks because they are counting on the income they produce, eliminating a dividend can be financially devastating.
But financial analysts say the best strategy for investors may be to do nothing. Often, though, people who count on dividend-paying stocks for income are not in a position to do that. Others may decide to sell for fear that if the company is suspending its dividend, the stock will slide further.
"You've got to look at the fundamentals of a company," said Roney & Co. stockbroker Larry Moss. "If the company is structurally sound and it has eliminated its dividend, I assume the stock has probably already dropped. Everyone who wanted to sell it probably has. So there is not much downside in the stock."
The shrewdest way to make a decision about selling or holding stock is not to wait until there is an announcement as sobering as cutting a dividend.
Consider what you will do now before such an announcement.