Companies cut dividends in '09 at a level not seen since 1930s

By Matt Krantz, USA TODAY

Stocks might have surged back nicely, but the damage to dividends could take years to repair.

Companies in the Standard & Poor's 500 are expected to slash what they pay to shareholders for all of this year by $52.6 billion, or 21%, from 2008, S&P says.

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That's the worst year for dividend cuts on a dollar basis, and the worst on a percentage basis since the 39% cut in 1938.

This dividend drought could curtail what investors expect from these cash payments for years to come.

"It was historic," says Kevin Shacknofsky, portfolio manager of the Alpine Dynamic Dividend fund. "If companies needed to raise money, the easy way was to cut dividends."

Cuts to dividends have been especially painful, since they historically account for 40% of stock investors' total returns. Thankfully, though, the strong 24% price rise in the S&P 500 has helped mitigate the dividend cuts.

Still, investors are hopeful that dividends will regain their footing because of:

•Signs the worst is past. Companies slashed their dividends so furiously, most of the cuts are over, says S&P's Howard Silverblatt. Companies cut dividends by $42 billion in the first quarter of 2009, beating the previous $23.4 billion record cut in the fourth quarter of 2008.

But dividends are on the mend. No S&P 500 companies have cut their dividend in a month and a half, and 198 increased their dividends this year, down 12% from 2008, but still a start.

•Expectations of an earnings rebound. S&P 500 companies are forecast to increase their earnings by nearly 35% in 2010. As profits recover, companies can afford to restore or boost their dividends. S&P 500 companies are expected to increase their dividends 6.1% in 2010, S&P says.

•Skepticism of stock buybacks. Tax laws now currently favorable toward dividends are due to expire in 2010. That's a strike against dividends when companies consider what to do with extra cash. Still, investors are likely to demand dividend increases instead of stock buyback programs, Shacknofsky says. Companies bought record amounts of their own stock at the market peak in 2007 only to cut back on buybacks when the market was bottoming in 2009.

Even so, dividends have a long way to go. Payouts in 2010 are expected to be nearly 17% below 2008's level, S&P says. It might be until 2013 before investors ever enjoy 2008-type dividends again.

"Dividend investors who are true to the cause will see modest benefits in 2010" and beyond, says Daniel Peris, fund manager at Federated Investors.

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