Transcripts

Stock Dividends Are Diminishing

PAUL KANGAS: Weakness in the housing sector is just one reason why corporate America is nervous about the economy. Companies are increasingly slashing their dividends to boost cash reserves. Erika Miller has more on what this means for individual investors.

ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: There's bad news for retirees and other investors who rely on stock dividends as a source of income. Corporate America has been drastically reducing, even eliminating, those payments. Sam Stovall of Standard & Poor's says there are plenty of reasons companies are nervous about their cash flow these days.

SAM STOVALL, CHIEF INVESTMENT STRATEGIST, STANDARD & POOR'S: The credit crunch, the housing crisis, the worry about the U.S. economy, worry about foreign economy, etcetera. And I think management is basically hoarding a lot of this cash to say let's hold on and wait for better times before we put this cash to work.

MILLER: In the first quarter of this year, 83 of the S&P 500 reduced or halted dividend payouts. That compares to 19 in the year ago period and 110 for all of 2007. Financial companies, including Wachovia and Washington Mutual, have been attracting attention for slashing dividends. But a greater percentage of cuts are coming from outside that sector. According to S&P, 6 percent of non-financial companies reduced their dividends in the first quarter. That compares to 3.5 percent for financials. Historically, investors have looked to utilities and telecom for reliable dividend income. But Brian Levitt at Oppenheimer funds sees better opportunities now.

BRIAN LEVITT, ECONOMIST, OPPENHEIMER FUNDS: Some of the best large cap growth U.S. stories are dividend payers and dividend growers. These are names like Anheuser Busch. These are names like Johnson & Johnson, a company like Microsoft.

MILLER: When a company lowers its dividend payment, it's not just bad for income-seeking investors. It often leads to a drop in the company's share price as well.

STOVALL: Not only would investors pull off from that share because they were looking for a higher yield, but also because in general, I think the projection of higher dividends was already built into those share prices, so you might end up taking a double hit.

MILLER: Given the worries about recession, experts predict corporate America will continue to cut dividends in the coming months, but they say companies feel more comfortable making the move when others are doing the same. Erika Miller, NIGHTLY BUSINESS REPORT, New York.