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Be Careful if You Use Dividend Yields As Your Guide for Valuation
By JLP | March 6, 2009
Wells Fargo just announced that they are slashing their quarterly dividend by 85%! EIGHTY-FIVE PERCENT! What used to be an annual dividend of $1.36 is now $.20. Based on Wells Fargo’s current stock price of $8.58, the dividend yield went from 15.9% to 2.3%.
To put it in perspective, if you had 1,000 shares of Wells Fargo, your annual income from those shares would drop from $1,360 to $200.
Yes, this was probably a good move on Well Fargo’s part since you can’t pay out what you don’t have. But, it also shows how counting on dividends can hurt you. I remember some guy on one of the business channels a while back talking about how great dividend yields were and I thought to myself, “Yeah, but what happens if dividends are cut?”
According to the article I read about the Wells Fargo dividend cut, they will increase the dividend when it becomes reasonable to do so. In other words, this is supposed to be a temporary thing but who knows how long that will be.
Topics: Business News | 7 Comments »
March 6th, 2009 at 12:32 pm
Yep.. Tread lightly into dividend-land.. Dividends are paid from earnings and earnings are hard to come by nowadays.
March 6th, 2009 at 12:36 pm
Yeah, seems everyone is cutting dividends to preserve cash on the balance sheet.
Makes sense… but when people purely dividend-invest it seems like they are missing out on the whole diversification aspect of the market.
March 6th, 2009 at 1:25 pm
No cash for business=No cash for shareholders. The good-ol’ days of relying solely on a dividend history have (temporarily) disappeared. Having said that, there are definitely still some huge opportunities in the investment world…
http://www.daveroland.com
March 6th, 2009 at 10:55 pm
Mamma always said, “If it sounds too good to be true, it probably is.” GE’s dividend yield stands at 14.6%. Sounds mighty fine!
March 10th, 2009 at 8:45 am
My Life ROI explained it best. Banks are in a unique position. Not only do they have to make the money they pay for dividends, but they also have legally-required capital reserve levels. In this mark-to-market environment, the banks have been reducing the value of their mortgage-backed securities, regardless of their performance. This reduces their capital reserves and forces them to look elsewhere to make up these reserves. The most obvious place is their dividend.
This does not mean the bank is not making money. This does not mean the bank has a lot of bad loans. It means their investments’ value has dropped.
March 10th, 2009 at 2:45 pm
Don’t I know it. I’ve got a WFC position and was collecting that quarterly .34 divvy for a while. Oh well.
March 18th, 2009 at 9:15 pm
Dividend yields are always tricky. Most quoted numbers tend to be backward looking so you compare the last dividend with the current price. Ideally, you’d like to compare the next dividend to see if the company is worth investing in (from a dividend / income generation perspective at least)