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
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
, 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.
If the company were to bring its dividend yield back down to 4.5%, that would imply an annual per-share dividend payment of about 42 cents, or 14 cents a quarter. If the board just makes a small adjustment to the dividend -- or leaves it intact -- the numbers suggest investors looking for high dividend yield have an incentive to buy into GE.
Many companies have trimmed or suspended their dividends to help preserve their credit ratings and survive the recession. With the big drop in CBS' share price in recent months, its dividend yield had climbed from 5.6% last June to 20% the day before the company announced it would cut its quarterly dividend to 5 cents, from 27 cents. The cut takes the forward dividend yield back down to 4.1% at Monday's trading price.
On Feb. 12,
, my pick from Jan. 12, ended its 97-year, unbroken streak of maintaining or raising dividends. The company reduced its quarterly payments to 15 cents, from 42 cents a share. Dow's dividend yield had been 16.7% prior to the announcement. With the subsequent 19% drop in the stock price, Dow's forward dividend yield drops to 7.4% -- more in line with the stock's historical yield in August of 5%.
Utilities have long been a haven for investors looking for reliable dividends, but the sector is also taking a hit. Utilities
Constellation Energy Group
( CEG) and
have rolled back dividends in recent weeks.
So, watch out for that that wild card, because dividend cuts can drive big changes in a stock's price.
Lenny "Nails" Dykstra, a guy who's used to winning, consistently profits from his deep-in-the-money options calls. You can, too, with his
Nails on the Numbers
and see how it works for you. If you decide to subscribe, just one winning call will pay for a whole year!
At the time of publication, Dykstra had no positions in stocks mentioned.
Nicknamed 'Nails' for his tough style of play, Lenny is a former Major League Baseball player for the 1986 World Champions, New York Mets and the 1993 National League Champions, Philadelphia Phillies. A three time All-Star as a ballplayer, Lenny now serves as president for several privately held businesses in Southern California. He is the founder of The Players Club; it has been his desire to give back to the sport that gave him early successes in life by teaching athletes how to invest and protect their incomes. He currently manages his own portfolio and writes an investment strategy column for TheStreet.com, and is featured regularly on CNBC and other cable news shows. Lenny was selected as OverTime Magazine's 2006-2007 "Entrepreneur of the Year."