Stay away from shares with big dividends

Posted Jan 27th 2009 11:55AM by Douglas McIntyre
Filed under: General Electric (GE), Economic Data, Wells Fargo (WFC)

Dividends are being cut at the fastest rate in 50 years. According to the AP, "Already this year, seven companies in the Standard & Poor's 500 index have decreased their dividends, removing some $12 billion from shareholders' pockets in the coming months."

As cash flow at big companies drops due to the recession, the trend is likely to get worse. GE (NYSE: GE) says its dividend is safe. That statement is true until it isn't. The conglomerate could still have unexpected losses from its financial unit. Wells Fargo (NYSE: WFC) still has a 7% yield. One of two bad quarters could knock that out.

Which companies are most likely to cut? Banks, of course. But, there are a few other signs: companies that are experiencing operating losses for the first time in years and have modest amounts of cash on their balance sheets. And, companies with a lot of debt and quarterly debt service. McClatchy (NYSE: MNI) is a perfect example. It still has an astonishing yield of 44%, but its shares are off to $.83 and quarterly debt payments are likely to be larger than operating income in the next quarter.

Watch for a round of dividend cuts as firms report earnings for the last quarter of 2008 and more if the current quarter is as bad as most analysts think it will be.

Douglas A. McIntyre is an editor at 24/7 Wall St.

Tags: dividends, GE, MNI, WFC