Counting on dividends? Not so fast

NEW YORK (CNNMoney.com) -- Investors who count on dividend payments as a "safe" investment are getting hammered right along with share prices.

Far fewer companies are raising dividends, while the number of firms cutting is moving sharply higher.

During the past six months, only 82 S&P 500 companies raised their dividends, compared with 143 firms in the year-earlier period, according to S&P data. Meanwhile, the number of companies cutting dividends topped 46 during the most recent six-month period, versus 17 in the prior year.

And when companies cut dividends, the payouts have lately been slashed by 50% to 80%, said Josh Peters, editor of Morningstar's DividendInvestor newsletter.

S&P estimates that dividend payments will fall by 22.6% this year, marking the largest decline since a 36.3% slide in 1938.

"People getting this are getting a pay cut," said Peters.

So, is there a silver lining? Perhaps.

Sectors to stick with: Companies selling consumer goods, manufacturing products, and pharmaceuticals are ones to stick with if you're looking for dividends in this economy, according to Bill Bouchard, founder of dividend investing research service Dividendinvestor.com.

"Those companies still have the liquidity and cash-flow to continue to pay and increase their dividend payments to investors," he said, singling out Kleenex maker Kimberly-Clark (KMB, Fortune 500), which announced in February that it would raise its dividend by 3.4%. The recession is "really separating the strong from the weak," he added.

Peters agreed, recommending utilities, food companies, and health care companies like Johnson & Johnson (JNJ, Fortune 500), which has held its dividend steady at 46 cents a share since April 2008, and Abbott Labs (ABT, Fortune 500), which raised its dividend by 11% in February.

"You're not seeing food companies cut their dividends, you're not seeing health care companies, with the exception of Pfizer, cut their dividends," he said.

Pfizer (PFE, Fortune 500) cut its dividend by 50% in January when it announced a $68 billion deal to buy rival drugmaker Wyeth (WYE, Fortune 500).

Meanwhile, McDonalds (MCD, Fortune 500) raised its dividend by 33.3%, and bulk food distributor Sysco Corp. (SYY, Fortune 500) raised its dividend by 9.1% in November 2008.

It's too early to tell which firms will emerge from the economy on top, according to David Van Knapp, a private investor who focuses dividend investing. But he added that companies with healthy balance sheets, good cash flow, and a standing tradition of boosting dividends are usually good bets.

"Distributing and raising dividends is part of the culture at many companies, a practice embedded over decades. Only the most dire circumstances will cause such companies to cut their dividends," he said. "Despite the recession and economic situation, not all companies are in those dire circumstances - yet."

Avoid financials: Financial companies and so-called 'cyclicals' -- companies that move in tandem with the economy, like auto and retail -- have been the most aggressive when it comes to slashing dividends, said Peters.

That comes as no surprise in an economy that has been officially in a recession for 15 months. Financial firms have taken a beating because of bad bets on risky investments. And in times of economic duress, consumers typically cut back on anything they deem non-essential.

Since the beginning of the year, only four financial companies in the S&P 500 have raised their dividends: Chubb Corp (CB, Fortune 500)., HCP Inc. (HCP), Hudson City Bancorp (HCBK), and T.Rowe Price Group (TROW). Meanwhile 21 financial firms in the index have either cut or suspended their dividends this year, including Wells Fargo (WFC, Fortune 500), which announced last Friday that it would slash its payouts by 85%.

Among non-financials, motorcycle maker Harley-Davidson (HOG, Fortune 500) said last month it would cut its dividend by 70%, while newspaper publisher Gannett Co (GCI, Fortune 500). said it would reduce its dividend by 90%.