Jim Cramer's Best Blogs
Jul 14, 2012 | 04:50 PM EDT
That 'Good Dividend' May Not Be So Good Posted at 11:12 a.m. EDT on Thursday, July 12 Nothing makes me happier in investing than getting a terrific dividend from a company. And with good reason. Time and again we have seen outsized dividends hold off sellers and stop declines. We have seen the power of reinvesting dividends to compound your gains. And we know that dividends have provided about half the return that investors have gotten in the last decade, a dismal decade for investing. If you pick stocks with good dividends, you are on the right track to successful investing. Ah, but here's the catch. It's the phrase "good dividends," because we have found that not all dividends are created equal. Take the sorry case of Supervalu (SVU - Get Report), one of the largest supermarket chains in the U.S., and a company that had told us over and over again that it was confident in its dividend and that it understood how important it was to shareholders. Remember, when stocks go down, yields become larger as the dividend stays the same size but the divisor -- old-fashioned arithmetic -- becomes smaller. Hence you get a bigger yield from the division. Few stocks in the S&P 500 had a bigger dividend than Supervalu going into today's session, not because the dividend was outsized but because the stock had shrunk. Today we found out what happens when we see this process play out for companies that have battered balance sheets and declining fortunes. The dividend gets slashed, or in this case eliminated, despite all protestations to the contrary that anything like that could occur, including assurances given to me on CNBC last year by the CEO, of comfort with that dispensation of cash directly from the company to you, the shareholder. Craig Herkert, the CEO, when asked about why the company eliminated the dividend, cited "holistic" reasons for the decision, whatever the heck that is. All I can say is it was a mighty bitter pill for shareholders, many of whom relied on that dividend as an important source of income. That 30 cents yearly, while not making up for the hideous two-thirds decline in the stock since 2008, did routinely draw in buyers with each reiteration of confidence that the CEO made.
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