The Case of the Disappearing Dividend

DRIPS

Dividend Reinvestment Plans

As COVID continues to add uncertainty to the financial markets, some companies have cut or suspended dividends. [1]

• Wells Fargo: dividend cut from $0.51.to $0.10.
• Occidental Petroleum: dividend cut from $3.16 per share to $0.44 *
• Boeing: Dividend Suspension. Prior to change $8.22 per share
• Estee Lauder: Dividend Suspension. Prior to change $1.92 per share *
• Nordstrom:  Dividend Suspension. Prior to change $1.48 per share

Cutting or suspending dividends is a way to “keep cash” as companies are not required to pay a dividend. 

Building up cash makes sense, especially for companies in industries that have been hit the hardest by the pandemic. Brick and mortar retail, the travel industry, the food industry.

How do companies decide if they will pay a dividend? Dividends are paid out of a company’s earnings. A company can choose to pass on some of the profit to shareholders in the form of a dividend.

Other companies like Amazon decide to retain earnings and reinvest in the growth of the company. That strategy has worked well for long term shareholders.

Right now, we are in “earnings season”. Over 1200 companies will report estimated earnings from July 29 to August 1^st. [2]

Earnings season provides an indicator of the overall health of a company and of the economy. One piece of the economic puzzle we are all trying to solve.

For generations, buying dividend paying stocks was THE way to generate income in retirement. It still is for many.

There is good historical evidence to believe companies who are paying dividends will continue to pay dividends. Except when a pandemic occurs.

The Dutch East India (VOC) company was the first public company to pay dividends.

They paid dividends from 1602 – 1800, almost 200 years.

Exxon Mobile has paid dividends for 137 years. Eli Lilly and Consolidated Edison (ConEd) have both paid dividends for 134 years.

It is one of the reasons that individual investors hold stocks for a long, long time.

The other reason to buy dividend paying stocks is the yield. Today you can buy a stock that is paying more in dividend yield than a bond pays in interest

When I buy a stock, I automatically choose the “reinvest” option.

Reinvesting means the dividend I receive is used to buy more shares of the same company. More shares mean more dividends. Dividends are reinvested and used to buy shares. 

I would call this a mutually beneficial relationship. It is not exactly BOGO* but you get the idea.

Dividend reinvestment plans are called DRIPS.

What happens when a dividend is cut or suspended?

First is the immediate loss of income for the shareholder.

The good news? Even though a dividend has been cut or suspended, it does not mean the stock price automatically goes down. Other investors may see the cuts or suspension in a positive light. 

The company is taking swift action to survive. Investors start buying, pushing the stock price up. It sounds counterintuitive but many things in the markets are.

For investors who have held shares of a company for a long, long time, now would be a good opportunity to reassess the relationship. Are you holding onto that stock because you have an emotional attachment? The company has been “good” to you?

Having a” relationship” with a company is not a good investment strategy.

 If your dividend income drops you need to decide if you are going to look at other companies to replace the income or hang out waiting for the dividend to come back.

Regardless of the length of time a company has paid dividends, dividends are not guaranteed. 

Dividends from mutual funds and ETF’s are not guaranteed either. 

On a brighter side there are still plenty of companies, like Procter and Gamble who after 63 years continues to increase their dividends, if only by a little.

There are still more stocks paying dividends than not paying dividends. 

Dividends are not going to disappear completely but be prepared for temporary cuts and suspensions well into 2021.

*Full disclosure : I own stock in Estee Lauder Co. and Occidental Petroleum. Looks like my reinvestment program just took a little hit, for now. No matter, I’m in it for the long term. 

[1] In 2020, 40 S&P 500 companies have suspended dividends and 18 said they were cutting their payouts, according to S&P Dow Jones Indices.

https://www.barrons.com/articles/more-s-p-500-companies-suspend-or-cut-dividends-51587906001

[2] If you are curious about a company and have your own theories, take them for a test drive. This website tells you when companies are releasing earnings.

https://markets.businessinsider.com/earnings-calendar

This website is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory or other services by The Modest Economist LLC.