While more than 60% of the companies that make up the S&P 500® Index increased their quarterly dividends in 2017,1 a handful actually reduced their payouts. Should such cuts be viewed as a sign of underlying trouble?
Not necessarily, says Steve Greiner, senior vice president of Schwab Equity Ratings® at the Schwab Center for Financial Research. “A reduced dividend could be a red flag,” he says, “but is rarely reason enough to sell.” In fact, some companies hoard cash in advance of a merger, to put cash back on their balance sheets or for a host of other productive reasons.
Investors should instead view a dividend cut as an opportunity to reevaluate the investment. “Review its fundamentals, check its Schwab Equity Rating (see “What you can do next,” below) and avail yourself of recent commentaries and company news,” Steve says. “If your reasons for owning the stock are still valid, by all means keep it. But if they’re not, it might be time to make a change.”
1Daren Fonda, “Don’t Get Burned When a Stock Cuts Its Dividend,” kiplinger.com, 02/2018.