Dividend stocks have been the staple for many an investor and huge number of investors have a bulk of money locked up in dividend blue-chips for a stable passive income source post retirement.
But has the carnage that is the S&P 500 now re-written the play book on dividend investing?
We do see that the equity culture is not dying as much as we would have thought, but insofar as the stock market can generate cash flows, the ability to do so with consistency is in question. Wells Fargo became the latest to cut its dividend – by 85% to a nickel per share in a move that will save the bank roughly $5 billion per year. So far this year, the amount of dividends that has been cut has totaled $40.78 billion (financials now represent 11% of total dividend payouts, down from the 2006 peak of 30%). In less than three months, the dividend cuts have already exceeded the $40.6 bln in all of 2008. According to S&P, dividends are on track to decline 23% this year, the most since 1938. According to the folks at S&P, the sharp curtailment of dividends (but the yield is 3.1%!! Hey – ever heard of a ‘value trap’?) is the equivalent of a 26% pay cut to the average retiree.
Most of the blue chip dividend players till 07 were the big banks, GE etc and we all know where they are today. Even JNJ which was holding up somewhat and logically is the one dividend stock I will buy if my life rested on it (servicing to the baby boomers as they retire will not go out of fashion too soon) has been pummeled.
The market is changing fundamentally and so is the decade old play book.