The Changing Nature Of Dividends

By Eric Fox | July 08, 2009 AAA

A recent report from Standard and Poor's demonstrates how the recession and financial crisis is altering the behavior of American corporations as it pertains to dividend policy. This has an important effect on investors return, as dividends are an important part of the total return of stocks over a multi-year period.

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Standard and Poor's reported that only 233 companies increased dividends in the second quarter of 2009, out of a total of 7,000 publicly traded companies that report data to the service. This was a 48.8% drop for the second quarter of 2008. The report also stated that 250 companies cut dividends in the quarter - the lowest since 1957.

Historically, dividends have been a large part of the total return of stocks. One study shows that if you excluded dividends from stock returns from 1900 to present, the return on stocks fall to an annual rate of only 1.7%, less than the return on long term Treasury bonds.

Clorox (NYSE:CLX), the maker of popular household products, upped its dividend in early June from 46-50 cents per share per quarter. If this rate holds up for the net 12 months, investors would get a $2, or a yield of 3.5%.

Duke Energy (NYSE:DUK) is a large utility company in the U.S., and owns approximately 35,000 megawatts of power, as well as 4,000 megawatts internationally. While the company only hiked its dividend by a penny to 24 cents per quarter, the trend is up and the yield on the stock is a hefty 6.5%.

Del Monte (NYSE:DLM) also announced a one-penny increase in its dividend, but it represented a 25% growth from the previous quarter. The stock has nearly doubled off its lows reached late last year, and pays investors a 2% dividend.

Some lesser-known stocks also raised dividends. Hatteras Financial (NYSE:HTS), which is a Real Estate Investment Trust (REIT) that invests in mortgage pass-through securities, moved its dividend up by 5 cents to $1.10. REITs must pay out a high proportion of net income to maintain status. Hatteras Financial has a yield of 16%.

American Capital Agency Corp. (Nasdaq:AGNC), also a REIT that invests in mortgage securities, moved its dividend from 85 cents to $1.50. If you annualize this dividend to $6 per year, the stock has a yield of more than 27%.

The Bottom Line
The nature of dividend payments among public companies is changing, as the recession and financial crisis takes a toll on cash flows. If this change is permanent, it will have a profound effect on investment returns in the future. (Learn about some issues that can complicate dividends for investors in our article, Dividend Facts You May Not Know.)

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