BOSTON - BANK stocks are no longer reliable sources of dividend income - a painful truth that cuts a little deeper now that one of the biggest traditional dividend-paying stocks, Citigroup, is restricted under a federal bailout from making quarterly payouts of more than a penny a share.
And with the deteriorating economy hurting other dividend-paying stocks as well, the list of sectors healthy enough to consistently distribute sizable portions of earnings back to shareholders is getting shorter.
But analysts say there are still some decent dividend opportunities out there, if you're willing to accept modest returns in line with the average 3.39 per cent dividend yield that stocks in the Standard & Poor's 500 were paying at the end of last week.
Financial services has typically been a reliable sector for dividend investors, making up about 34 per cent of S&P dividend payouts at the beginning of last year. But that proportion has now shrunk to about 21 per cent. This year, financial companies have accounted for 41 of the 50 dividend cuts by stocks in the S&P 500, and nearly US$32 billion (S$48.5 billion) of the total US$34.4 billion in reduced payouts, S&P found.
Citigroup last year ranked No. 3 for the biggest dividend payouts, with its total US$10.78 billion exceeded only by General Electric's US$12.53 billion and Bank of America's US$11.36 billion.
But Citigroup has slashed last year's average quarterly dividend payout rate of 57 cents per share to 16 cents after cuts announced in January and September. (Its latest quarterly dividend is due to be paid out at that rate on Friday).
And even that reduced 16-cent quarterly payout will seem rich compared with the distributions Citigroup investors can expect in coming quarters.
Under the bailout announced on Sunday night, Citigroup is barred from paying quarterly dividends of more than a penny per share for three years, unless the company obtains consent from three federal agencies - the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp.
The government imposed the limit in exchange for agreeing to shoulder as much as US$306 billion in possible losses at the stricken bank and to plow a fresh $20 billion into the company.
Citigroup is hardly the only big bank cutting dividends. Bank of America last month broke a 30-year string of increasing annual dividend payments and slashed its usual quarterly payout in half.
With many traditional dividend-paying industrial stocks under pressure amid a slowing economy, utilities are increasingly looking like one of the last good bets around for dividend investors, experts say.
'Utilities appear to the center of more interest,' said Mr Howard Silverblatt, a senior index analyst with S&P. 'Simply put, people can understand their business, generally believe their product is necessary and will continue, and they have a long tradition of dividends.'
Financial stocks appeared to gain the upper hand among dividend investors a few years ago after some utilities got into debt trouble following industry deregulation, Mr Silverblatt said. But now, 'it's moving back to utilities.'
Mr Josh Peters, editor of the Morningstar newsletter DividendInvestor, said most publicly traded utility stocks 'are still in pretty good shape to maintain dividends. The wild card is that they do need to have access to capital and the equity markets in order to finance capital programs, which is tough in this environment'.
There are still some banks that remain healthy, and haven't made some of the risky plays that have hurt the dividend-paying abilities of so many others, Mr Peters said. His three picks: US Bancorp, with a dividend yield of 7.5 per cent; Wells Fargo, with 6.3 per cent; and BB&T, with 7.6 per cent.
'It's hard to generalise; in banking, it's still very much a matter of good bank, bad bank,' Mr Peters said. -- AP
