The Biggest Dividend Stock Disasters Of All TimeBy Shauna O'Brien | Published January 9th, 2013
Dividend stocks have become popular partially due to the fact that they are viewed as safe investments. Unfortunately in investing, there is always some risk involved.
Although many investors have been very successful with dividend stocks, others have lost money when share prices drop or dividends are cut. Since dividends are not guaranteed, if a company is experiencing problems, they often reduce or even completely suspend dividends. Below are seven former big-time dividend players that imploded in recent years, sucking down billions of dollars in shareholder value along with them. Don’t believe everything you read about dividend stocks, here are 5 Common Misconceptions About Dividend Investing.
1. General Motors (GM)
The General Motors Company is an American multinational corporation founded in 1908, and the largest automaker in the U.S. The Detroit-based company designs, builds, and manufactures cars, trucks, and auto parts throughout the world. GM also offers auto loans in its financial services division.
GM paid reliable, consistent dividends for several decades during its glory days. In the mid-2000s, however, the company hit a major snag. With a dividend yield rising over 10%, the stock was seemingly still an attractive investment. After all, it had reliably paid a 50 cent dividend each quarter from 1997 to 2005. The reason for such a high yield? A sharply dropping share price. GM shares plunged from over $60 in early 2003 to under $20 in early 2006.
Unfortunately, all too many investors didn’t realize that eye-popping yield was simply too good to be true. In February 2006, GM cut their dividend in half to a 25 cents per share. On May 15, 2008, the company paid its last 25 cent dividend. GM promptly suspended its dividend altogether, sold $4 to $7 billion in assets, and cut 20% of their salary costs to save billions of dollars. And still, some investors held on.
Then came the final blow. In 2009, GM declared bankruptcy. The stock price went to zero. Thankfully for its employees, the company was subsequently bailed out by the U.S. government. GM later became public once again in October 2011 on the NYSE, but has yet to re-initiate a dividend payout.
Eastman Kodak is a photographic and imaging equipment company that was founded in 1989. The Rochester, NY-based firm is best known for its photographic film products. The company was very well positioned in the industry during the 1970′s, but began to struggle in the 1990′s when the print photo industry began to crumble.
Kodak paid a quarterly dividend for several decades, hitting its prime in 1988 with a quarterly payout of 50 cents per share. The dividend amount later declined to 40 cents in 1994, but went up by 4 cents to 44 cents in 1997. For the next six years until 2003, the company paid consistent 44 cent dividends every quarter with an average of a 6.7% dividend yield.
In October 2003, the company cut its dividends by 43% to 25 cents quarterly, decreasing the dividend yield to 1.9%. Kodak reported that the drastic cut in dividends was due to a new company strategy which included increased investment in newer technology. The news brought Kodak’s stock down -18% in a single day.
Finally, in April 2009, Kodak announced that it would no longer pay dividends on its stock as a result of declining sales. In January 2012, the company, which had been struggling for years, declared bankruptcy.
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3. J.C. Penney (JCP)
J.C. Penney, which was formally known as Penny’s, is a department store chain founded in 1902. The Plano, TX-based company operates over 1,100 stores, and previously maintained a catalog business along with many discount outlets.
The company paid dependable quarterly dividends that reached above 50 cents in 1996. For three years until 1999, JCP paid dividends between 52 cents and 55 cents every quarter. In 2000, JCP cut dividends by 53% to just $1.03 annually in order to raise money to invest in its stores. The following year, dividends were cut again, this time by 62%, to 12.5 cents per share.
That payout level remained until 2007, when JCP faked out investors by actually raising its payout to 20 cents. It continued to pay 20 cents quarterly for the next five years. Then on May 15, 2012, J.C. Penney suspended its dividend program as part of a larger business transformation. The stock dropped some -42% over the next few months as many dividend investors quickly headed for the exits.
4. Barnes & Noble (BKS)
Barnes & Noble was founded in 1917, and is the largest book retailer in the U.S. The New York-based company operates both book stores and college book stores, and is located in all 50 states. In addition to books, the retail chain also offers magazines, newspapers, DVDs, graphic novels, gifts, games, and music.
BKS paid a quarterly 15 cent dividend from 2005 to 2008. In 2008, the company increased their dividend payment amount by 40% to 25 cents, averaging a 5% dividend yield at the time. After major competitor Borders declared bankruptcy, BKS suspended their dividend payments in February 2011 in order to save money to invest in digital strategies so that they would be better positioned to compete with leading competitor Amazon.com. The stock plunged some -69% in the two months following its dividend suspension.
5. Washington Mutual
Washington Mutual, which was also known as WaMu, was a savings bank holding company which was founded in 1889. The Seattle based company’s goal was to be the “Wal-Mart of Banking.” With this goal, the company’s target market was lower and middle class consumers that were not able to receive financing from other banks since they were considered too risky.
WaMu was at one time the largest savings and loan association in the U.S., building its fortune on the backs of subprime loans. Over the years, it steadily grew its dividend to 56 cents per share by the end of 2007, yielding over 5% at the time. But in December of that year, the bank, facing the implosion of the housing market and utter annihilation of its subprime mortgages, slashed its dividend to 15 cents.
Just over a year later, the company cut their dividend again to one penny a quarter. On September 26, 2008, WaMu declared bankruptcy, and JP Morgan acquired what was left of the company’s operations.
6. Citigroup (C)
Citigroup is a financial services corporation. The New York based company is the largest financial services company in the world, operating in over 140 countries. Starting with 9 cents a share in 1998, the company paid increasing dividends every quarter for several years. By May 2003, the company’s dividend had increased to 23 cents, and then increased again three months later to 35 cents. In 2007, dividend payments for Citigroup were at an all-time high of 54 cents. At this time, the subprime mortgage crisis was becoming more and more of a problem, resulting in the company cutting its dividends by 40% in the beginning of 2008 to 32 cents.
In October 2008, the dividends were sliced again by 50% to 16 cents, and then to just 1 cent in January 2009. The company chose not to pay a dividend for the next two and a half years. With its stock sitting under $5 per share in May 2011, Citi pulled some real financial chicanery, executing an almost unheard-of 1-for-10 reverse stock split. That move pumped its share price up to $45 per share, and it resumed a one penny per share dividend payout, which continues to this day.
7. Bank of America (BAC)
Bank of America was founded in 1998, and is the second largest financial services company in the U.S. The Charlotte, NC-based company serves consumers, small and middle market businesses, corporations, and governments. The company focuses on banking, investing, and asset management.
Since the 1980′s Bank of America paid regular quarterly dividends which increased a couple cents every year, seeing its peak in 2007 and 2008 with a dividend of 64 cents a quarter. When the financial industry began to suffer and the company started declining in profit, BAC cut its dividend in December 2008 in half to 32 cents, and then down to 1 cent the following quarter. Bank of America currently maintains that very same 1 cent per share payout.
The Bottom Line
The dividend stock world is littered with its fair share of recent disasters. The factors that led to the downturn of once mighty dividend payers are vary greatly. Some companies simply failed to change with the times. Others have incompetent management to blame. Still others took on massive risks that eventually came back to bite them. Most of these companies exhibited at least one of the following signs before their massive dividend cuts, however: a sharply falling share price, or a lack of dividend raises over a long period of time. If investors do their homework and heed these warning signs, they should be able to avoid dividend blow-ups like the ones listed above.