Dividends are under pressure

Update 08 Mar 2009: Remember this:

Wells Fargo gave anxious investors a pleasant surprise Wednesday, reporting a profit drop that was milder than anticipated and lifting its quarterly dividend by 10 percent.

Wells Fargo’s second-quarter profit fell 22 percent as more customers at the nation’s fifth-largest bank failed to pay back their loans. But it raised its dividend to 34 cents from 31 cents – at a time when many other financial institutions are slashing theirs to preserve capital.

Very foolhardy now that Wells has been forced to cut its dividend to 5 cents even after receiving $25 billion from the federal government. So, I am re-posting this story as a reminder of what lies ahead.

Recently, there has been a lot of to-do about the fact that U.S. stocks now pay more in dividends than the 10-year bonds pays in interest.  For 50 years, stocks earned less in dividends.  There are two takes on this turn of events: one is bearish and one is bullish for stocks.  Which one do you think I believe?

The first theory goes like this:  stocks have gotten slammed and are down about 50% from their highs.  This has increased their dividend yields to a level above treasury bonds for the first time in 50 years.  That is an indication that stocks are a screaming buy at these levels.

The second theory is a tad different:  stocks have gotten slammed and are down about 50% from their highs.  This has increased their dividend yields to a level above treasury bonds for the first time in 50 years.  This is an indication that those dividends are under pressure and will have to be cut.

While I see merit in both sides of the argument, on the whole, I come down on the side of argument number two.  Dividends ARE being cut and they will be cut even more going forward.  Yes, there are screaming buys in the market, but I do not see the market as a whole as a screaming buy here.

If you are making stock purchases based on the dividend yield, you are going to be disappointed because those dividends are going to be cut.

Source
The S&P’s dividend yield now higher than the 10-year T-note’s – Mark Hulbert, Market Watch