Dividend Suspensions and Reductions – A Natural Characteristics of Economic Cycle.

In one of my earlier posts, I had discussed how smaller ones gets ignored, or gets buried under the media onslaughts, or perhaps they do not have the oomph! Dividend cuts by financial institutions (BAC, C, WFC, etc.) and corporations that supposedly represent American economy (GE, GM, PFE, etc) have been in headlines. In fact business media have been so focused on them that speculations with various scenarios start well before the announcement of dividend suspensions or reductions. In addition, business media has also given a wide coverage to Standard and Poor’s projection that cumulative dividends from corporations in S&P500 index will reduce by 13.3% for year 2009. In this environment it is likely for individual investors to get distracted and flustered by the dividend cuts. However, before we do that, let us look at current dividend situation in historical perspective.

The attached graphic (published in Business Week Magazine) shows a summary of number of corporations that have increased, decreased, or suspended their dividends. Since March 2008 to February 2009, the number of corporations increasing dividends has been consistently higher by significant number. Except August 2008, every month more than 10 corporations have increased their dividends. In February 2009, approximately 30 corporations have raised their dividends.

DividendTree SnP500 dividends

Now if we look at the cumulative results from March 2008 to February 2009, then out of the 500 corporations in the index:

  • 205 corporations have increased their dividends;
  • 63 have decreased their dividends; and
  • 25 have suspended their dividends.

Historically, after 1989, any new entrant to dividend aristocrat list stayed for an average of 6.5 years (source). What this means is on an average the dividend aristocrat will reduce or suspend dividends after 31.5 years (i.e. 25 years to become aristocrat + 6.5 years after listing). In addition, in the 15 year period starting from 1989, there have been approximately 120 corporations that have come and gone through this list. If not from 1989 then from 1992 onwards we have been in a secular bull market. Even during the secular bull market there were dividend aristocrats who were suspending or reducing dividends. The aristocrat list itself continued to churn during the 15 year long bull market.

We can see that there is nothing new or out of ordinary about dividends suspensions when we put the current trailing twelve months data (i.e. number of dividend decreases or suspensions) in context of last 20 years. Dividend suspension or reductions are natural part of any economic cycle (bull, bear, growth, recessions, etc.)

The graphic also shows that there is increasing trend in number of corporations that decreasing or suspending their dividends. However, there are still 205 corporations that are increasing their dividends. While I would agree that all 205 corporations may not have good quality of dividends, but then do we individual investors really need 205 corporations to invest?

Just because few well know corporations suspended their dividends, it does not mean every other corporation is doing the same. Dividend growth is still alive, healthy, and it continues to prosper. American economy still consists for many corporations that can sustain themselves without TARPing and TARARing. It’s a natural characteristic of business media to ignore the smaller non glamourous ones.

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