2019 was a record year for dividend payments from publicly-traded
U.S. corporations. In 2019, U.S. companies paid $491 billion in dividends. At
the start of this year, the expectation was that payouts
would top $500 billion for the year, but the federal and state government
shutdowns of much of the economy has changed those expectations. Over the past
two months, the number of dividend reductions and suspensions are the most
since 2009.
On April 28, the Wall
Street Journal reported a total of 216 reduced or canceled dividends. The
breakdown was 135 decreased, and 81 suspended. There have been more dividend
reduction announcements in the few days, as we move fully into the 2020 first-quarter
earnings season.
Here are some of the name brands that have slashed or
suspended dividend payments:
- Ford Motor Company (F): Dividend
suspended.
- General Motors (GM): Dividend suspended.
- Harley-Davidson, Inc. (HOG): Dividend slashed
by 95%.
- The Boeing Company (BA): Dividend suspended.
- Royal Dutch Shell plc (RDS.A):
Dividend reduced 66%. First dividend cut since World War II.
For investors that depend on dividend income, the cuts are
brutal. With hundreds of companies that have announced dividend reductions, or
soon will, it is hard to know where to invest. In these crisis days, I divide
dividend-paying stocks into three categories.
- First up are the companies that continue to pay
regular dividend rates through the crisis. These are the companies with
conservative balance sheets, businesses that sustain themselves throughout the
crisis, and boards of directors that believe in taking care of shareholders. These
are the stocks you want to buy or add shares during this market downturn. One
example from my Dividend
Hunter newsletter is ONEOK, Inc. (OKE). Historically, OKE was priced
to yield around 5%. Now it yields 12%.
- Next are companies that likely could continue to
pay their regular dividends, but have decided instead to be careful and
conserve cash until there is a better idea of when the crisis will end. With these
companies, you can expect the dividend to quickly recover when the economy gets
back to something that looks like normal. New Residential Investment Corp
(NRZ) is a stock in this camp. Out of caution, NRZ cut its common stock
dividend by 95% at the start of the crisis. I expect the dividend rate will
quickly ramp up post-crisis.
- The final group is those companies whose
business operations have been mortally wounded by the coronavirus-triggered economic
shutdown. The companies in this group may be forced to negotiate with creditors
to stay afloat or even declare bankruptcy. There will not be free cash flow to pay
dividends again for many years, if ever. Types of companies in this category
include upstream energy companies, cruise lines and airlines, and the auto
manufacturers. See list above for examples.
The COVID-19 pandemic will have lasting effects on business
and the economy. You do not want to hold on to stocks in the third group with
the hope the share prices will soon recover—it will not happen. And even some
great long-term dividend stocks may not be able to return to their former
dividend payment levels.
However, companies in the first two groups are in a good
position for both increased dividend payments and share price appreciation when
the economy is open again for business. Use these category classifications to
help you decide which dividend stocks to prune and which to add to your income-focused
investment portfolio.
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