February 3, 2013

Dividends Are Not That Safe

I generally like the idea of investing in stocks that pay good dividends.  This has been a strategy of mine with my Roth IRA investments.    I was using a High dividend stock strategy in 2008 but at that time as I said it wasn't hard to find blue chip stocks paying 4-7% yields and ETFs yielding 4-9%.  That was a reflection of the stock market being full of bargains at the time.  Nowadays yields from dividends aren't as high and stocks aren't as cheap in general.

When you've been writing a blog for nearly five years like I have you sometimes end up repeating yourself.   I first wrote about this topic in 2009 with the article Are There Safe Dividends? and I pointed out then that dividends really are not 'safe'.   I found out myself after GE slashed their dividend not long after I had bought them.   I later questioned Why Do I Own GE Stock?

Of course it wasn't just GE that cut their dividend.   A lot of major companies cut dividends during the financial crash around the Great Recession.

Lets look back at the Dow components from 2008.

8 of the 2008 Dow components  have since had dividend cuts:
Bank of America (BAC) down from 0.32 to .01
Alcola (AA) slashed dividend from .17 to .03
American International Group (AIG) went from $4.40 to 0
Citigroup (C) cut their dividend a few times from $5.40 to $3.20 then $1.60 then finally to 0.10 after 1:10 split
GE from .31 to .10 like I mentioned
General Motors - bankrupt from 0.25 to 0
JP Morgan Chase (JPM) - 0.38 to 0.05 back up to 0.3
Pfizer (PFZ) .32 to .16 but the up to .22

Now not all those stocks are still on the Dow as the Dow changes gradually over the years  as some stocks are removed and others added.

Thats just over 25% of the Dow components from 2008.   And these are the big name blue chip companies that are generally safer and more established.

Now this is not to say that investing in dividend paying companies isn't a good strategy.  But you shouldn't put too much faith in the future payout rates on those dividends.   I see people building dividend paying portfolios with the intention of building a passive income.  If you'd done that in 2007 and bought up Dow stocks then retired early with the intention of living off the dividends then you might have been in for a nasty ~25% cut in income come around 2009.


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