Sunday, July 20, 2008

Dividends going bye-bye

I've already discussed here how corporate dividends have been giving way to stock buybacks, and how this has reduced the yields and true worth of U.S. stocks. Now, to make matters worse, many companies are actually reducing their already inadequate dividends.

Heather Bell at Index Universe reports that 97 U.S. companies reduced their quarterly dividend payments in the second quarter of 2008, which is the largest number of dividend reductions since 1990. Let's think about what this really means: American companies collectively found enough cash to buy back $171 billion worth of shares in the 3rd quarter of 2007, and more than $1 TRILLION worth in the last 2 1/2 years, but are now unsure of their ability to pay only $70 billion in quarterly dividends. If these companies had saved that trillion dollars instead of buying back shares with it, then they would have plenty of cash reserves now for maintaining their dividend payments during these lean times, and those constant dividends would actually make it worthwhile to buy and hold U.S. stocks. (*gasp!*)

But stocks aren't really investments right now. As far as the average U.S. investor is concerned, stocks are simply pieces of paper that corporations are trying to buy back as fast as they can. Prices are falling this year partly because companies don't have as much buyback cash as they used to. If and when corporations restore their cash flows to 2007 levels, they can resume their buybacks, and prices will rise again. The only trick for you and me then is to predict when this turnaround happens, and to stay out of the market until then. The dividend payments we get for buying and holding simply aren't worth the price.

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