Dividends will fall 10 percent in the fourth quarter, estimates Standard & Poor's, the biggest quarterly decline in 50 years. But excluding financial-services companies, which accounted for 35 dividend cuts, the outlook is fairly healthy.
Dividends will fall 10 percent in the fourth quarter, estimates Standard & Poor’s, the biggest quarterly decline in 50 years.
But excluding financial-services companies, which accounted for 35 dividend cuts, the outlook is fairly healthy. Most companies are expected to continue paying dividends, and more than half will have boosted them in 2008, S&P says.
Morningstar equity strategist Josh Peters says during downturns, investors should be wary of cyclical businesses, which are sensitive to the economy, such as automakers and other manufacturers. “For more cyclical businesses you really need a clean balance sheet,” Peters says.
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Two that fit the bill are Caterpillar (CAT), yielding 4.1 percent, and Illinois Tool Works (ITW) at 3.6 percent. “With some stocks, recession can be a silver lining,” he says, noting yields rise as share prices fall. Yield is dividend divided by share price. Peters also looks for consistent dividend growth, pointing to Abbott Labs (ABT), yielding 2.5 percent, and beverage firm Diageo PLC (DEO), at 4.9 percent.
Peters also says to look at payout ratio, the percentage of earnings paid out as dividends. While it varies by industry, “I’d say that on average if the payout ratio is more than 50 percent, then you have to be concerned,” he says.
Yield-hungry mutual-fund investors might be wise to choose large-company value funds with no more than 30 percent in financials, says David Kathman, a fund analyst at Morningstar. Vanguard Equity Income (VEIPX) and T. Rowe Price Equity Income (PRFDX) have moderate financial stakes, good yields and low expenses, he says.