Whose Dividend Can You Trust?

Ten high-yield stocks worth owning, and ten to avoid because their payouts are in jeopardy.

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).

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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.

Worth owning

AT&T (symbol T) $26, yield 6.2%, annual dividend $1.64. The telecom giant boosted its dividend by a smaller-than-usual amount for 2009. The yield is as high as it is only because the stock has been hammered unfairly.

Chevron (CVS) $66, 3.9%, $2.60. Suspending share buybacks will protect cash dividends despite low oil prices.

Eli Lilly (LLY) $34, 5.8%, $1.96. Even after it pays shareholders a whopping $1.5 billion a year, the drug giant still has cash left to add to its reserves.

IBM (IBM) $101, 2.0%, $2.00. The yield is low, but frequent boosts in payouts separate Big Blue from the rest of the tech sector, which doesn't pay a lot of dividends.

Kimberly-Clark (KMB) $50, 4.8%, $2.40. Minimal debt and low capital expenditures leave the maker of Huggies and Kleenex ample cash to pay big dividends.

Merck (MRK) $26, 5.8%, $1.52. When it comes to cash in the till, this drug maker is even stronger than Lilly.

Pitney Bowes (PBI $25, 5.8%, $1.44). Although business is sluggish for the maker of mailing equipment, the company recently raised its dividend. The yield is unusually high for an industrial company.

Qwest Communications (Q) $3.50, 9.1%, $0.32. The western Baby Bell reinstated dividends in '08 with great fanfare, so it isn't eager to backtrack and anger already-impatient investors.

Realty Income (O) $22, 7.6%, $1.68. This real estate investment trust with a history of raising payouts leases stand-alone properties to nationally known retailers, a predictable cash generator.

Southern Company (SO) $30, 5.6% $1.68. An extremely sound electric company ideal for conservative income investors.

Best to avoid

Avery Dennison (AVY) $28, 5.8%, $1.64. A maker of adhesives, labels and office products, the company ended a 32-year streak of payout increases last year. It's now cutting back to deal with debt overload.

Corporate Executive Board (EXBD) $15, 11.7%, $1.76. The consulting firm has boosted dividend outlays by 300% since 2005; the current payout is almost as high as the company's fast-sinking profits.

DuPont (DD) $28, 5.9% $1.64. Reducing share buybacks will help the chemical giant maintain cash dividends. But DuPont is paying out 60% of its net income, and it still has to finance big capital expenditures.

Eastman Kodak (EK) $4.50, 11.1%, $0.50 (the dividend now has been suspended). The plunge in Kodak's share price matches the inexorable decline of its film business. Kodak has diversified into digital cameras and printers, but it continues to burn cash rapidly.

Gannett (GCI) $3.75, 4.3%, $0.16. Although the giant newspaper chain recently hacked its dividend by 90%, business is so bad that another cut seems likely.

MeadWestvaco (MWV) $14, 6.6%, $0.92. Payer of a steady 23 cents a quarter since 2002, but cash flow and earnings are deteriorating.

Mercury General (MCY) $33, 7%, $2.32. This auto insurer has credit problems, and lots of healthier insurers are cutting dividends.

Nokia (NOK) $15, 3.5%, $0.52. The Finnish phone maker has already trimmed dividends once, but more cuts are likely as business deteriorates further.

PPG (PPG) $45, 4.7% $2.12. The maker of coatings and paint raised its dividend in mid 2008. But homebuilders and carmakers are big customers, and PPG is now in extreme cost-cutting mode.

Watsco (WSO) $40, 4.8%, $1.92. Like PPG, this distributor of heating-and-cooling products is suffering from the downturn in construction.

Jeffrey R. Kosnett
Senior Editor, Kiplinger's Personal Finance
Kosnett is the editor of Kiplinger's Investing for Income and writes the "Cash in Hand" column for Kiplinger's Personal Finance. He is an income-investing expert who covers bonds, real estate investment trusts, oil and gas income deals, dividend stocks and anything else that pays interest and dividends. He joined Kiplinger in 1981 after six years in newspapers, including the Baltimore Sun. He is a 1976 journalism graduate from the Medill School at Northwestern University and completed an executive program at the Carnegie-Mellon University business school in 1978.