Ways to Find Companies That Won’t Cut Dividends

For many investors, one of the most challenging aspects of a recession is the decline in dividends that often accompanies it.

First, let’s review dividends. When a company earns profits, it often pays a share of those profits to its shareholders (directly or through mutual funds). These profits are called dividends. Typically, dividends are paid by well-established companies that generate regular profits but are too mature to grow significantly.

In a recession, many companies cut or suspend their dividends, and we see that happening now. According to Standard & Poor’s, a record number of companies cut their dividends in the first quarter of 2009. As a result, dividend decreases outpaced increases for the first time since S&P started tracking dividends in 1955 – resulting in a net dividend decrease of $77 billion.

How can you predict whether a company will cut dividends?

The size of the company. Many of the earliest dividend cuts were made by large companies. Although smaller companies could be next, the unfavorable investor sentiment resulting from cuts by larger companies could inspire smaller ones to prevent cuts.

The type of stock. Dividend cuts on preferred shares, which are hybrid securities that resemble both stocks and bonds, are rarer than dividend cuts on common shares.

A history of raising dividends. By regularly committing to distributing more of its earnings to shareholders, a company may be signaling that its prospects are good.

Where companies get the money to pay their dividends.
Many financial advisors like to see dividends supported by current earnings rather than a company’s nest egg of cash and marketable securities.

Of course, you may not be comfortable poring over a company’s books and researching its history. In this case, you can always help protect yourself from a dividend cut via two standbys: consult your financial advisor, and maintain a diversified portfolio.