Last week signaled a sad turn for the “widows and orphans” stocks — classic income providers that were once bread-and-butter favorites of investors.
General Electric Co. knocked its dividend down to 4 cents a year — essentially zero — and slammed the door shut on more than a century of rock-solid dependability, both as a business and as a reliable provider of income to its shareholders.
Budweiser maker Anheuser-Busch InBev last week cut its dividend by half to reduce its $109 billion pile of debt from its acquisition of SABMiller in 2016.
The cuts reminded me of how fast companies can lose their mojo, and how quickly dividends can vaporize — even with icons like GE, a major force in the rise of America’s industrial might and its standard of living.
A decades-old term, “widows and orphans” refers to unbreakable companies that will take care of family survivors, whether a child, a widow or a widower. Think blue-chip stocks, or the now popular close cousin, S&P 500 Dividend Aristocrats.
“Widow-and-orphan stocks were designated as such for their safety and income,” said David Kass, a finance professor at the University of Maryland. “In the past, they included utilities and regulated monopolies, such as AT&T and Con Edison, along with Exxon, Texaco, General Motors, Eastman Kodak and IBM.”
Let’s explain why dividend income matters. At a time when the average savings account is paying next to nothing, owning a battleship stock with a dividend that pays 3, 4 or 5 percent keeps you ahead of inflation. And remember, both stocks and dividends (one hopes) increase the longer you hold them. And reinvesting dividends to buy more shares is a key component in boosting stock returns over the long haul.
“Widow and orphans pay a good dividend and have the ability to grow that dividend over time,” said Charlie Toole, head of dividend income strategy at Adviser Investments, which has $5 billion under management. “So you are not losing purchasing power.”
Let’s say you bought health-care company Johnson & Johnson for $60 a share a decade ago. The current dividend of $3.60 per share means you are earning a 6 percent return on that purchase a decade ago. (Yield is the dividend as a percentage of the stock price when you buy the share.) I would take that yield in a heartbeat. However, if you bought the stock at today’s price of $140, the yield is 2.56 percent.
“We call it ‘yield on cost,’ ” Toole said. “Over time, your yield on cost grows.”
I love yield on cost.
Hundreds of widow-and-orphan firms — at one time representing the best in breed of American business — have disappeared in the past century. Many, such as Budweiser, were bought by other companies. Many failed. I bought shares in a company called American Home Products two decades ago. Now it’s part of Pfizer.
Remember Eastman Kodak, which virtually cornered the planet’s film processing business? The Rochester, N.Y.-based company ended its dividend nearly a decade ago, after the business was kneecapped by the revolution in digital photography. Kodak declared bankruptcy in 2012. Sears looks like its toast. Anyone remember Polaroid?
The 2009 financial crisis certainly took its toll on dividends. The 527 companies that cut their dividends in 2009 included GE and several other heavyweights: Alcoa, Dow Chemical, Macy’s, JPMorgan Chase and Bank of America, according to a report last week by CNBC.
A total of 28 companies have been dropped from the S&P 500 Dividend Aristocrats since 2006 for cutting or not increasing their dividend, according to ProShares, a Bethesda-based ETF company.
I look at trustworthy dividend-payers now and wonder how much of a sure thing they are, even with strong balance sheets and generous dividends. Will old reliable Coca-Cola (I own some) survive the sugar wars? Will Big Oil and utilities (I own some of both) survive climate change and renewable energy?
Take IBM, a bastion of American technology, with a robust dividend. I am not saying IBM is disappearing, but it has wobbled. Warren Buffett sold his IBM shares this year, calling his original analysis “a mistake.” And Big Blue last week acquired software provider Red Hat in what some see is a $33 billion Hail Mary pass to catch up in the cloud.
“Business models come and go, and with them, profits and dividends,” said Jamie Cox, who buys and sells stocks as the managing partner of Richmond-based Harris Financial Group.
Think of Verizon, which has a healthy 4.5 percent dividend yield.
“Verizon is a perfect example of a company that would have become obsolete, and the dividend kaput, if it didn’t go away from wired and into wireless,” Cox said. “It was on a path to be General Electric and made a course correction.”
McDonald’s has been in the ultracompetitive fast-food sector for more than six decades, fighting off burger, pizza, you-name-it companies that have been trying to knock Mickey D’s out of the box. McDonald’s pays a 2.6 percent yield that it has increased for 40 years and running.
AT&T, on the other hand, has an impressive dividend yield (6.5 percent) but has struggled in a very competitive industry, Toole said. “It has taken on a lot of debt with big acquisitions such as DirectTV and Time Warner. The large debt basically prevented them from raising the dividend the way they once have,” he said.
The big banks, and even your local community bank, with the president you saw at church on Sundays, were once widow-and-orphan stocks. Not anymore.
Simeon Hyman, global investment strategist at ProShares, said two major sectors are underrepresented in the Dividend Aristocrats.
“Technology companies are not included, because the 25 years it takes to increase their dividends is too long to qualify,” Hyman said. “And remember, the big banks all cut their dividends in the financial crisis. So you can see the carnage of dividend cuts ’08 and ’09.”
Cox said banks are safer, but their ability to increase dividends has been reduced by regulation.
“Banks were definitely once included in the widow and orphans category,” he said. “Dodd Frank slammed the door on that one.”
Cox said future widows-and-orphans companies are impregnable cash cows such as Microsoft, the software company that he called a “cash machine.” (I own some Microsoft).
“The world would not run at all if not for Microsoft,” Cox said.
Cox said he looks for businesses that generate lots of cash that can cover the dividend, such as McDonald’s (2.6 percent yield).
He also sees some light for tobacco giant Philip Morris (5.4 percent yield). Big Mo, as it has long been known, in part for its reliable dividend, makes Marlboro, Parliament and Chesterfield cigarettes. Cox said the company has a rich future, if it can navigate from the embattled cigarette sector into the blossoming marijuana business.
“That could be a frontier market that could propel dividend payments for years,” Cox said.
Not all high-dividend stocks are Dividend Aristocrats or widows-and-orphans stocks. Aristocrats must be a member of the S&P 500 and have a strong balance sheet and a record of increasing dividends over 25 years.
That zaps Buffett’s Berkshire Hathaway. Even though the conglomerate has great finances, it does not pay a dividend. Buffett thinks he can increase the company’s stock price by investing the money instead of giving it to shareholders.
“Buffett likes to invest in companies that pay dividends,” Kass said. “His policy is not to pay dividends, but to own companies that do pay them.”