May 31, 2009

Are There Safe Dividends?

I must admit that I was a bit surprised when GE dropped their dividend for the first time in 71 years. Just last November they had given some assurances that their 31¢ dividend rate would hold through 2009. But then just 3 months later they cut the dividend from 31¢ down to 10¢. Yikes. If GE can cut their dividend then is any dividend really "safe"?

No dividend is truly "safe" and there is no guarantee or obligation for the company to continue to pay a dividend. A company may cut their dividend at any time based on their financial situation. Or in the worst case if a company goes bankrupt then they will no longer exist to pay a dividend. If you are investing in stocks based in part on dividend yields or if you are counting on dividend yields for retirement then you should be aware and plan for the possibility that companies may cut their dividends.

Some dividends are safer than others. The dividend of a financially sound company with consistent profits and lots of cash in the bank is going to be safer than the dividend of a company with significant losses and substantial debts. This Businessweek article lists what they consider to be the US Companies with the Safest Dividends.

Certain kinds of companies are more likely to continue paying dividends. For example a REIT (Real Estate Investment Trust) is required to pay 90% of its profit out in dividends. That is part of the structure of a REIT. Other unique companies like the BP Prudhoe Bay Royalty Trust (BPT) are setup specifically to pay out a dividend yield as part of their operations. These types of stocks have more obligation to pay dividend. But even they are not "safe" to count on. The dividend of a REIT will fluctuate and is only as safe as their ability to make profits. Many REITS have cut their dividends lately. The BP Prudhoe Bay Royalty Trust dividend rate is dependent on the price of oil. Due to the drop in the price of oil the latest dividend from BPT for April is less than 1/3 of what it was back in July 2008.

Bottom line : if you are investing in stocks with dividends then keep in mind that dividend payment rates are not guaranteed and are never really totally "safe".

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