Dykstra: Dividend Yields Cut to Size

Companies that have reliably paid dividends for years are making the difficult choice to pare them back in this recession. Just last week, the New York Times(NYT Quote), CBS(CBS Quote) and Harley-Davidson(HOG Quote) reduced or suspended their dividends.

Dividends aren't a significant factor in picking stocks for my deep-in-the-money call options strategy, which has a win record of 95-1. Yet, by keeping tabs on a company's dividend outlook we can anticipate some investor behavior. Funds and investors that depend on this form of return are more likely to dump a stock that entirely suspends or eliminates its dividend, making cuts behave like a wild card that can push a stock down suddenly.

Many financial stocks have also been forced to slash dividends in recent months. All this is playing havoc with stock metrics known as the dividend yield. This ratio is a stock's annual dividend divided by its stock price. The dividend yield tells investors which stocks will pay them the most dividend cash for their buck.

When we think dividends, we think of companies like General Electric(GE Quote), which has paid a quarterly dividend of 31 cents - or $1.24 annually -- since December 2007. The company has always been cautious about increasing its dividend -- in the past raising it by fractions of a cent. The company began paying out a full penny a quarter in June 1977 and has always been careful not to roll back the amount.

Let's look at what's happened with GE's dividend yield in recent months. In August, when the stock was trading in the high-$20s, its dividend yield was just 4.5%. With the steep drop in the stock price to $9.38 on Friday, the yield has jumped to 13.2%, making GE look more attractive. But the company's board said in early February that it is evaluating whether to maintain the current dividend level for the second half of 2009 due to the recession.