Whose Dividend Can You Trust?

Shareholders of BB&T have many reasons to smile. A positive profit report on April 17 added BB&T to the list of banks whose balance sheets and stock prices are on the mend. BB&T stock soared 11.15% on the day to close at $23.42, up 80% from its low of $13 in early March. The stock (symbol BBT) hadn't been $13 since 1995.

You’ll hear more cheers in May, when stockholders of the nation’s 11th-largest bank cash another dividend check for 47 cents a share. BB&T, bucking the trend among giant banks, has steadfastly refused to reduce its quarterly stipend. "We have a very strong earnings engine," chief executive Kelly King said on a conference call reviewing the bank’s successful first quarter. BB&T has raised dividends 37 straight years. It earned 48 cents a share in the quarter, enough to cover the current dividend with a penny to spare. Analysts didn’t believe BB&T would even come close.

Yet this tradition might not last. BB&T, which has branches and mortgage and insurance offices from the Washington, D.C., area through the Southeast down to Florida and out to Tennessee and Kentucky, could be ground zero in the battle to keep high dividends reliable. Falling earnings, heavy debt, scarce credit and desperation are causing hundreds of companies to cut, suspend or abolish cash payments to investors (which also include executives, employees and often, the founding family).

In BB&T’s case, the bank wants to repay "as fast as humanly possible" the $3.1 billion in Treasury capital it accepted (grudgingly) last year. Regulators will make the call on whether the bank can afford to extricate itself from the government's relief program. The quid pro quo could be an involuntary cash-saving decision to chop that treasured dividend. "It’s a tough issue," King says. By early June, or earlier, BB&T’s directors will declare the next quarter’s payment. The 47-cent distribution could stay, shrink, or virtually vanish.

Anything can happen. Look at some other recent dividend actions: JPMorgan Chase, from 37 cents a quarter to 5 cents. General Electric, from 31 cents to 10 cents. Bank of America, from 64 cents to 32 cents to one. None is a failing company, just a struggling one.

Don’t think only bank and finance and insurance company dividends are at risk. Ameren, an Illinois electric utility, cut its rate from 64 cents to 39 cents. Macy’s, the retailer, went from 13 cents to 5 cents. Gannett, the newspaper chain, chopped its rate from 40 cents to 4 cents. And, in a real sign of pain, Dow Chemical dealt its first dividend cut in 97 years, from 42 cents to 15 cents. The message: If Dow can cut, anyone can cut.

With stock prices so depressed, these lower dividends still mean a reasonable yield. Dow’s new rate works to almost 5% on April 17’s closing price of $12.50, still above average for industrial companies. If Dow hadn’t cut, its yield would be 12%. (When you see a yield that high, don’t think for a second the payment is secure).

At least Dow and GE and most of the banks still pay something. A bunch of real estate investment trusts -- whose very reason for existence is to deliver consistent, high cash dividends -- have switched to paying mostly or entirely in stock. Worse, this sometimes is new stock that dilutes the value of shares that have already fallen 50% since 2007 because the real estate business is strapped and struggling to refinance heavy debts. Yes, you can sell the shares as soon as you get them, but at flea-market prices.

New rules. The art of dividend investing has changed in many ways since 2007, says Dan Peris, manager of Federated Strategic Value fund. Back then, when company officials declared a dividend to be sacrosanct, Peris believed them and so did the stock market. Historically, during recessions and bear markets, high yielders and companies that regularly boosted their dividends had proved to be safer than companies that didn't pay dividends.

Not this time. "Today, we take everything with a grain of salt," Peris says. "We're in wartime now, especially in the financial sector." He assumes that all dividends from banks, insurers and real estate trusts are in danger. Standard & Poor’s says more than 100 U.S. companies cut dividends in the first quarter of 2008.

There are a few hopeful developments. An array of blue-chip companies, including AT&T, Chevron and Kimberly-Clark, has stopped buying back shares in the open market and is using that money to maintain cash dividends. Jeremy Schwartz, director of research for WisdomTree exchange-traded funds, points to other cash-preserving alternatives, such as freezing or stretching out construction projects and other capital expenditures. These can save a company more than a dividend cut and without scaring the shareholders as much or not at all.

The end of company share buybacks would be positive, says Peris. Buybacks are supposed to help investors because they reduce the number of shares trading and therefore boost earnings per share. But mistiming has turned it into a money sieve. Peris says many executives "have egg all over their faces" after paying bull-market prices to repurchase shares that subsequently plunged. The same billions could have gone to improve operations, trim debt, shore up pension funds, pay better salaries, or reward shareholders directly. "We want cash," Peris says, and frankly, you should too. Here are ten high-yielding stocks (current yields and prices as of April 17) whose cash dividends are reliable and could even rise this year. Then come ten whose yield is at risk. That list is on top of all banks and financial companies, even BB&T.