Dividends Plummeted 21% in 2009

Posted Dec 27th 2009 11:20AM by Zac Bissonnette
Filed under: Management

According to Standard & Poor's, companies in the S&P 500 are expected to have cut their dividends by 21% for the year 2009 compared with 2008. According to USA Today's Matt Krantz, "That's the worst year for dividend cuts on a dollar basis, and the worst on a percentage basis since the 39% cut in 1938."

It could take years before dividends rebound to the levels of past years -- and that is likely to be driven as much by suspicion of share buybacks as by increased generosity on the part of corporate boards.

But here's the reality for shareholders: In itself, that would be a good thing. Because of the double taxation that applies to dividends, they are an extremely inefficient means of returning value to shareholders. Share buybacks are far superior. If you'd rather have cash than a larger stake in the company, sell the stock and find something else!

Krantz notes that "Cuts to dividends have been especially painful, since they historically account for 40% of stock investors' total returns. Thankfully, though, the strong 24% price rise in the S&P 500 has helped mitigate the dividend cuts."

But the problem with that thinking is that paying dividends reduces the amount of cash on a company's balance sheet that can be invested -- thereby reducing the total return. If dividends had been higher in 2009, all other things being equal, the price rise would have been lower. Contrary to popular belief, dividends are not manna from heaven and removing assets from a company does lower the company's value.

Tags: Dividends, inthenews, Matt Krantz