Dividend cuts are now becoming fast and furious as companies scramble for cash amid these difficult credit markets and plummeting asset values. The list of companies that have cut their dividend in the past few weeks would be very long. Just today, JP Morgan Chase (JPM) as well as Russel Metals (RUS) in Canada were examples of the latest dividend casualties. No dividend is safe in this market.
As far as I could see today the S&P 500 index came very close to breaching it's 10 year low of 741 points, which it sunk down to on November 20, 2008. Investors are seeing no reason to own stocks right now as earnings estimates continue to decline and economic indicators are downright ugly and getting worse. This week is setting up to be an interesting one.
Despite all of this doom, gloom, and towel throwing, I still believe a lot of dividend streams are safe and these stocks can be bought confidently for the long term. My income from investments chart is struggling to keep it's head above water, and it doesn't feel great. This was the chart that was supposed to have one direction....up.
Dividends At Risk
Any company involved in the financial industry might cut their dividend. This includes the Canadian banks and insurance firms. Also, any company who derives their earnings from commodities could cut their dividend if they have not already done so. Does this make these firms bad long term investments? Not necessarily. Should you automatically sell a company that cuts it's dividend? Absolutely not.
While no company's dividend is 100% safe, I believe there are many companies in the market who derive their earnings from stable sources and have strong balance sheets. These stocks pay dividends that should not be cut. Examples of these companies are those who sell consumer staples, most health care firms, telecommunications and utility firms, and other companies that derive earnings from relatively stable sources. A low pay out ratio, strong brands, and a history of raising dividends helps. Does this make these firms good long term investments? Not necessarily. Is keeping a dividend always a bullish sign? Absolutely not.