To make our world easier to understand and explain, we like to organize and categorize things into groups for ease of reference.
Dividend Stocks are no different. They can be placed into a few categories based on their historic performance and expectations for the future. Here are three broad categories:
The Good
As you might guess, these dividend stocks that are doing exactly what they should do -
consistently raising their dividends each year in spite of troubled economic times. Many of the companies in this group are in sectors that are less affected by the economic downturn, but they have one thing in common, they are well-managed by executives that understand the importance of growing the companies dividends.
The Bad
Companies that hold their dividends flat. Dividend growth investors are looking for companies that can consistently raise their dividends year after year. Sometimes a company can't do this this. Instead of cutting the dividend, they hold it flat and try to weather the economic storm. This may not always be a bad thing, because it shows that management understands the importance of maintaining its dividend. Many dividend investors, myself include, may overlook a single flat year.
Once a stock freezes its dividend at the current rate, I treat that as a significant warning signal. If I don't own the stock, I will not consider initiating a position in it, and if I do own the stock I will not make any additional purchases made until its outlook improves or deteriorates to the point it is sold.
The Ugly
Companies that cut their dividends. For investors in
dividend growth stocks, there is nothing worse than a dividend cut. Remember, a growing income is the reason we bought the stock in the first place.
Fourth quarter 2008 when it seemed everything was coming apart was one of the worst periods for
dividend cuts. Fortunately, things have improved since then, but there is still a steady trickle of companies that have cut their dividend after years of growing or maintaining it.
Conclusion
Over the long-term, the best companies to add to our dividend portfolios are those that will continue raising their dividends even during
economic downturns. These stocks tend to have conservative payouts of less than 50%, which allows them to maintain their dividends during the tough times. They also have growing sales and earnings - you can't continue to pay higher dividends unless you have the earnings and cash to back it up.
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