- Buffett's Predictions For Next Year—And Every Year
- Governments Must Act to Avoid More Dubais: El-Erian
- Oil Demand Sees Year-Over-Year Rise, First Since 2007
- The World's Biggest Debtor Nations
- Blue Nile CEO: Having 'Best Cyber Monday Ever'
- Goldman Sachs Party Ban: No Gatherings of 12 or More
- Fed Tweaking Plan to Pull Money Back out of Economy
- Scientists Gone Wild: Climate Debate Turns Nasty
- Slideshow: The Real Cost of the 12 Days of Christmas
- Best Online Retailers to Buy Now: Internet Analyst
- ESPN The Magazine’s Body Issue: A Financial Success
- Cyber Monday: The Last Vestige of Dotcom Hype
- Dubai Fear is 'Noise'—Stay Fully Invested: Strategist
- Tech Comes to Holiday Shopping's Rescue?
- Timeless and Time-Tested Warren Buffett Watch Predictions
- Roginsky: The Botax Whose Time Has Come
- Buy or Hold: Analyst Rates 10 Retail Stocks
- Execs: Tis The Season To Take Control
MOST SHARED
- Timeless and Time-Tested Warren Buffett Watch Predictions
- Black Friday Sales Disappoint Investors; Amazon Up
- Tiger Woods Wants to Protect Family Privacy: Agent
- Governments Must Take Steps To Avoid More Dubais: El-Erian
- Tamminen: Copenhagen And Beyond
- BofA Aims to Clearly Spell Out Credit Card Terms
- US Senator Opposes Fed Chief Bernanke Renomination
- Dubai's Nakheel Seeks Suspension $5.25 Billion in Bonds
- Tiger Ads Continue To Run Today
Text Size 
Dividend-paying stocks, seen as a safer bet as the broader market deteriorates, have become a trickier play as some companies cut or eliminate dividends to shore up balance sheets.
At least 10 major companies have taken actions against their dividends this quarter as the crumbling economy puts pressure on earnings.
 |
Oliver P. Quilla for CNBC.com NYSE Traders |
Among them, Bank of America [BAC
Loading...
()
] reduced its usually reliable dividend to a penny, and Motorola [MOT
Loading...
()
] on Tuesday said it would suspend its five-cent per share dividend. Department store chain Macy's [M
Loading...
()
] slashed its dividend to five cents from 13.25 cents as the company announced 7,000 layoffs and warned of a rough economic road ahead.
The changes make for an even more challenging investing environment.
"You just don't know who the next company's going to be to take a look at this thing—and their earnings are bad so they cut their dividend," says Nadav Baum, managing director of investments for BPU Investment Management in Pittsburgh and a proponent of dividend-paying stocks even in the weakened financial sector. "That's a tough scenario for investors."
To navigate the minefield, market pros are taking various strategies—paramount among them looking for plays that take advantage of high dividends but minimize risk.
"We're very cognizant of which dividends are sustainable," says Emily Sanders, CEO of Sanders Financial Management in Atlanta. "While all CEOs will protest loudly that dividends are secure, there are chinks in the armor now because some are having to cut dividends to raise capital or preserve cash, or companies that are recipients of the TARP (government rescue funds) have uncertainty."
Companies on shaky ground have been paying large, sometimes-double digit dividends, but Sanders calls them "accidental high-yielders" that are using high dividends to compensate for low stock prices. She's avoiding them mostly, though some of the companies, such as Dow Chemical [DOW
Loading...
()
], could be good investments should the dividends hold up.
But there have been indications recently that Dow's board could cut its astronomical 14.5 percent dividend, underscoring the difficult choices investors face.
 |
"If you see dividends getting into double digits of common stocks that's usually a sign that something's got to give," Sanders says.
ETFs, Selected Other Plays
Yet Baum remains an advocate for dividend payers. Solid companies with good balance sheets, though increasingly difficult to find, will still pay solid dividends ahead even if their share prices take their lumps as Wall Street continues to try to regain its footing, he says.
So he's employing a strategy that's becoming more popular among those who still believe in equities yet want protection from downturns: Buying exchange-traded funds of dividend-paying stocks that contain a basket of companies, so that if a few do cut dividends the larger fund will still deliver a return.
"I'm still a big dividend buyer, but now as opposed to looking at individual equities...I think you spread out the risk and go to the ETF models," Baum says. "When you take a look at the history of the markets, dividends are a big piece of the puzzle."
One of the most direct vehicles to get financial sector dividends from an ETF is the Financial Select Sector SPDR [XLF
Loading...
()
], which holds BofA but also contains a slew of other performers that is allowing the fund to pay a 6.16 percent dividend.
With the demand for the financial sector to play a leadership role when the stock market recovers, investors would be wise to find a safe way to participate.
Video: Squeeze Bondholders to Save Banks?
"Markets always hit bottoms when it's the worst doom and gloom, and it's doom and gloom for the market now," Baum says. "For the market to truly rebound, for it to have a sustainable rebound, the financials have to be a part of it."
Outside the financials, some analysts have utilities, health care and some insurance companies poised to hold dividends.
The key, they say, is to stay away from companies that are paying exorbitant yields but have shaky financial pictures. Troubled companies need to pay high rates to compensate for the risk involved.
For Investors
- Stock Picks: Two Financials With a Future
- Charts: S&P May Rally Short-Term
- Slideshow: Are My Mutual Funds Safe?
"Dividend stocks have always been a segment of the asset class that offers downside protection. The real risk is, will they continue to pay," says Tom Busby, of the Diversified Trading Institute. "Try to think of the basic needs of people and go from there as your general premise."
Busby recommends MetLife [MET
Loading...
()
] as a company paying a modest 2.6 percent dividend but offering safety and stability going forward.
Elsewhere, Baum also is taking the dividend play to fixed-income ETFs that may even offer stronger stability and more reliable yields than equities.
Among those he uses are the iShares iBoxx Investment Grade Corporate Bond [LQD
Loading...
()
] fund and its 5.55 percent dividend, as well as its iBoxx High Yield Corporate Bond [HYG
Loading...
()
] fund with an 11.1 percent yield.
"There's a lot in the ETFs and the fixed-income areas where you can get some good yield right now and get some growth on it as well as this credit crisis continues to thaw out," Baum says. "All this stuff with the stimulus the government is doing at some point is going to kick in."
Print
Email
- Ever wished your cab driver would stop chatting and just get to where you're going? Well, that moment is closer than ever.
- UPS is giving its customers the option to offset its carbon emissions when sending a package.
- Romania's presidential campaign has been rocked by a video that may show the president striking a 10-year-old boy.
- Raising alligators is hard work, and the fickle taste of rich consumers has just made it much harder, says the NY Times.
- The continued real estate boom in China is partially fueled by a generational flood of newlyweds.
- Shopping for a gadget hound? The choices can be baffling. Here are a few that should be a hit.
Data is a real-time snapshot *Data is delayed at least 15 minutes