Tuesday, May 19, 2009

More Dividend Stocks to Avoid

The number of dividend cuts in the S&P Dividend Aristocrats index increased to seven, as two more financial stocks cut their dividends in May. Because of the timing of the index rebalancing, these stocks would continue to be on the elite dividend index until the end of December 2009. Historically dividend cutters have underperformed the stock market while dividend growers and initiators have outperformed the stock market averages. As a dividend growth investor I buy stocks that keep growing their dividends and sell stocks that cut or eliminate their dividends.

The two stocks, which recently slashed dividends in 2009, will most likely be taken off of the elite dividend index in December are Legg Mason (LM) and BB&T Bank (BBT)

Legg Mason (LM) cut its dividends in May after reporting losses for the last quarter of 2008. The company had just been added to the S&P Dividend Aristocrats index in December 2008. This must have been the shortest a company stays on average in the ranks of the elite dividend index.

BB&T Corporation (BBT) is the latest dividend aristocrat to cut dividends, in an effort to repay the TARP loan from the Treasury. This action would save the company $725 million on an annual basis. In addition to that the Winston-salem based North Carolina bank also sold 75 million shares for 1.5 billion dollars in order to repay the government sooner. BBT had been raising dividends for 37 consecutive years. Check my analysis of BB&T Corporation.

The Dividend Aristocrats index is hardly an exception to the rule however. The dividend achievers and the international dividend achievers are two other indexes, which still include dividend cutters in them. Pfizer (PFE) and Nokia (NOK) are two such examples.

Pfizer (PFE) cut its dividend payment in half in when it decided to acquire Wyeth (WYE) in an effort to extend the life of its portfolio of drugs. This made it easier for the company to fund the deal, which was financed by debt, equity and cash. Check my analysis of Pfizer.

In January Nokia (NOK) cut its dividend in an effort to reflect lower earnings, preserve cash and position itself for slide in mobile phone sales. This was the first dividend cut for the Finland based company since 2002. Chech my analysis of Nokia.

It is a curious phenomenon to see plenty of dividend cutters and eliminators still being part of dividend indexes, which is trickling down to dividend etfs and mutual funds. While these stocks are polluting the income indexes, it seems that certain investment strategies based on dividend growth investing are not being tracked correctly. Another reason why I would not consider investing in dividend ETFs is exactly the fact that certain stocks could be held in the fund, even though their place should not be there.

Relevant Articles:

- Dividend Stocks to Avoid
- Why do I like Dividend Achievers
- International Dividend Achievers for diversification
- Why do I like Dividend Aristocrats?
- Dividend Aristocrats List for 2009

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