Dividend-Paying Stocks Have Cloudy Future

Stocks that pay high dividends generally performed well Friday, with Southern Company (SO Quote) up 5%, SBC Communications (SBC Quote) up almost 4% and Eastman Chemical (EMN Quote) and Philip Morris (MO Quote) up about 3%.

To be sure, dividend-paying stocks have historically outperformed. From 1980 to 2002, the total return from dividend-paying stocks was 2.7% better than the return from non-dividend payers, according to Standard & Poor's. And if the economic recovery is more sluggish than investors are hoping for, dividend-paying stocks could come back into vogue as investors seek out safe havens. Still, a weaker recovery could also force some companies to cut their dividends or eliminate them entirely.

In the fourth quarter of last year, the dividend payout ratio for stocks in the S&P 500 stood at 145%, according to S&P. That means firms were paying out more to shareholders than they were making in earnings. Although the ratio has fallen sharply since then amid a pickup in corporate profits, some analysts worry that dividends at some firms could be in jeopardy.

In an effort to preserve much-needed cash, several companies have already been forced to suspend, eliminate or cut their dividends, which were very high relative to their depressed stock prices. Goodyear Tire and Rubber (GT Quote) eliminated its dividend earlier this year, while El Paso Energy(EP Quote) said it would reduce its quarterly payout. Meanwhile, speculation about whether J.P. Morgan (JPM Quote) and some of the tobacco companies can maintain their dividends remains. Although Microsoft (MSFT Quote) began offering a token dividend earlier this year for the first time, the company has some $40 billion of cash on its balance sheet, which is unusual for any company.