Don't worry, your dividend is safe
Yes, more bank stocks will probably cut their dividends this year. But plenty of techs, drug companies and industrials are likely to raise their payouts.
NEW YORK (CNNMoney.com) -- It's been a difficult time for investors who like the security of a dividend.
Over the past two months, a number of major financial institutions -- including Washington Mutual (WM, Fortune 500), National City (NCC, Fortune 500) and most recently bond insurer MBIA (MBI) -- have all cut their dividends to raise capital amidst the ongoing credit crisis.
And with the economy slowing down and some experts even predicting a recession, there has been speculation that some retailers and consumer products companies may be forced to trim their dividends if consumers start tightening their purse strings.
It's not a decision that companies want to make since a cut in the dividend is often viewed as a sign that a firm is in financial trouble.
"Companies will do whatever they can not to cut their dividend," said Jill Evans, a co-portfolio manager of three dividend funds at the New York-based Alpine Funds.
Nevertheless, experts contend that the dividend is here to stay and in fact, is starting to enjoy a renaissance after decades of serving as the telltale mark of a company with little to no growth prospects.
Last year, on the surface, was not a good one for investors counting on dividends. A greater number of companies decreased or suspended their dividend compared to 2006, while fewer firms opted to increase their dividend payment, according to Standard and Poor's.
If you dig deeper, many shareholders still enjoyed a nice payout in 2007. Fund manager WisdomTree, which oversees 33 domestic and international dividend-weighted exchange traded funds, saw the total amount of cash dividends from the 1,400 U.S. companies in its Dividend Index fund climb more than 8 percent from 2006 to $288.5 billion.
And despite recent dividend cuts within the financial sector, many other companies could be poised to raise their payouts to investors this year.
Other sectors, like tech, telecom, healthcare and industrials, are enjoying plenty of earnings growth right now and appear fairly insulated from an economic slowdown or recession.
To that end, tech giants IBM (IBM, Fortune 500), Intel (INTC, Fortune 500) and Texas Instruments (TXN, Fortune 500) all boosted their dividend last year, as did AT&T (T, Fortune 500), General Electric (GE, Fortune 500), Caterpillar (CAT, Fortune 500), defense contractor Lockheed Martin (LMT, Fortune 500) and drug maker Eli Lilly (LLY, Fortune 500).
"Looking outside of financials, everyone is in nice shape," said Howard Silverblatt, senior index analyst at Standard & Poor's.
In particular, companies that have plenty of cash on hand but are limited in the number of growth opportunities available to them may look to adopt or ramp up their dividend payments.
But it has only been within the past few years that the dividend has made a comeback.
In the 1990s, many companies were more likely to repurchase stock as a means to reward shareholders. Businesses argued that stock buybacks were a better use for their cash since they reduced the number of shares outstanding, and hence, boosted earnings per share.
Buybacks also tended to be viewed as a sign that a company feels its prospects were strong because the company was willing to invest in itself.
The unpopularity of the dividend peaked during the tech boom of the late 1990s when investors overlooked blue-chip stocks paying attractive dividends in favor of companies promising plenty of growth.
"In the late 1990s, any company that paid a dividend was perceived as a non-grower," said Edward von der Linde, a portfolio manager of the Lord Abbett Mid Cap Value Fund and Lord Abbett America's Value Fund.
But after getting burned by the accounting debacles at companies such as Enron and WorldCom earlier this decade, investors want to see a good faith gesture from Corporate America, von der Linde said.
"Management's image has been tarnished and shareholders are more skeptical. Being more skeptical, they will demand more cash flow," he said.
In addition, Congress passed a law in 2003 that reduced taxes on dividends. That helped encourage some companies to start paying dividends and for companies that already paid them to increase their dividends.
What's more, as baby boomers head into retirement, more and more are likely to look to stocks that pay healthy dividends. As a result, CEOs and corporate boards, who may be tempted to shun paying a dividend, may have to respond accordingly - a trend Alpine Funds' Jill Evans terms the "grumpy old man" syndrome.
"We have this aging population and a need for a dividends and income," said Evans.
So even though investors in bank stocks may wind up seeing their dividend payments shrink this year, there should be plenty of other companies not affected by the mortgage crisis that can continue to raise their payouts.