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Seeking Alpha: Dividend Cuts Mean Investors Need to Be Cautious

Seeking Alpha: Dividend Cuts Mean Investors Need to Be Cautious

By    |   Thursday, 10 March 2016 08:00 AM

A growing number of publicly traded companies are cutting dividend payments to shareholders, which means investors need to be more cautious in their search for yield, according to Reuben Gregg Brewer, a former executive director of research at Value Line who writes a Seeking Alpha blog.

“The amount by which companies have increased their dividends has tumbled about 50 percent since 2013 based on dividend increases so far this year,” he writes, citing data from The Wall Street Journal. “Unfortunately, dividend cuts in line with the cuts seen in early 2015 would put this year on pace to match the highest level of dividend cuts since 2009 and more than were seen in 2008.”

The S&P 500 fell more than 50 percent from a 2007 high to bottom March 2009 as the global economy suffered its worst recession in 80 years. The stock benchmark more than tripled in value by 2015 as central banks throughout the world supported a recovery with a massive expansion of the money supply.

Brewer says the U.S. isn’t in a recession, but that doesn’t mean that companies won’t cut dividends when faced with slower growth.

“That recession that isn't taking place today could be right around the corner,” he writes. “On the other hand, it could mean that companies are taking the hit now, and there won't be as large a spike in dividend cuts if we do end up in another recession.”

He said the 400 dividend cuts in 2015 isn’t as bad as the 525 seen in 2009, but it’s still above the average of 250 a year between 2012 and 2014. That should make investors cautious.

“Right now is a bad time to chase yield. Just because a company has paid a dividend in the past doesn't mean it will continue to do so in the future,” he writes. “Conservative types should focus on companies that generate plenty of cash flow -- that, in the end, is what pays you your dividends.”

The demand for dividend payers is partly driven by the prospect that the Federal Reserve won’t raise interest rates as much as was estimated in December, when the central bank timidly boosted rates for the first time in nine years. Meanwhile, European countries and Japan have embraced negative interest rates – effectively punishing financial institutions that park money at central banks.

“Investors that focus on total return, which is dividends paid and the increase in a stock’s price in a given period, are often more interested in companies that are consistently growing their dividends, as opposed to those that pay the highest dividends,” according to a report at 24/7 Wall Street. “Dividend growth usually means that a number of positive metrics are being met, and the company can consistently add to the pot of money that is returned to shareholders.”

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A growing number of publicly traded companies are cutting dividend payments to shareholders, which means investors need to be more cautious in their search for yield, according to Reuben Gregg Brewer.
dividend, investing, caution, stocks
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2016-00-10
Thursday, 10 March 2016 08:00 AM
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