Post-Madoff, Beware Benign Dangers

Additionally, the failures of Enron and WorldCom in the last bear market, combined with the multitude of failures from the current bear market, should teach us that any company can fail. A bunch of safe, mature, dividend-paying financial companies were not so safe after all in 2008. Why couldn't a bunch of safe, mature, dividend-paying consumer or utility stocks encounter their own meltdown?

From more of a bottom-up perspective are issues with the stocks themselves. I recently saw Dow Chemical (DOW Quote) mentioned as being attractive for its dividend. While I do like the name -- I own it for clients -- it is in the process of paying what could be reasonably argued as much more than fair-market value for Rohm & Haas, and Dow Chemical and Kuwait recently canceled a joint venture for a petrochemical plant in the country. These two events, combined with whatever the ultimate magnitude of the economic slowdown turns out to be, could mean that a dividend cut would not be the most shocking event.

That is not a prediction -- simply an easily visible path to a dividend cut. The same could be said for many stocks. One contributing factor to the financial crisis was chasing higher yields in various asset classes. High-quality, safe, high-yielding, blue-chip stocks are also an asset class not without risk.

If big safe banks like Wachovia and Washington Mutual (WM Quote) can fail (one way or another), then your favorite consumer stock or utility can certainly cut its dividend. This is not an argument to avoid dividend stocks because dividends are crucial to long-term portfolio success. But do not conclude that every dividend is safe and do not chase yield for its own sake. A good company capable of paying its dividend that is trading at a very high yield is likely a good long-term purchase, but blind faith without proper due diligence is likely to end very badly.