How difficult is it to find a safe high dividend stock in 2009?

The Wall St. Journal recently reported that, in 2009, S&P 500 companies' dividend reductions and suspensions are nearly equal to dividend increases, (60 increases vs. 51 reductions/suspensions).

Compare this to 2007, when there were 129 dividend increases vs. only 2 dividend cuts/suspensions, and you can see why income investors in 2009 face big challenges finding safe dividends, let alone high yield dividends.

Indeed, 8 of the Dow 30 blue chip stocks have cut their dividends in the past year, and even the revered S&P "Dividend Aristocrats" group has seen an unprecedented rise in dividend cuts, and an historic lack of increases. The 2009 Dividend Aristocrats group has had 5 cuts and 32 unchanged dividend payouts, vs. no decreases from 2003-2008. In 2006-2007, all 52 stocks in this group increased their dividends, and in 2008 their were 41 dividend increases and 11 unchanged.

So, where can you go to find a dependable dividend yield? Many value investors start their search with the Dividend Aristocrats, which features companies with 25 consecutive years of increased dividend payouts.

Intuitively, it's logical to assume that companies that can increase their dividends for 25 years or more must have strong business models, with steady cash flow, in order for them to keep paying shareholders in this fashion.

However, as noted above, circumstances can change dramatically, so, investors hunting for safe high yields should look closely at the most recent performance of stocks in this group.

To have a pre-disposition to buy and hold stocks for the long-term can be an extremely expensive frame of mind. The long-term market trend is up, but in a volatile stock market, the long-term gain is often laden with risk and not nearly as great as many short-term gains. Risk vs. return has greatly increased for the long-term stock market investor. People argue that tax consequences are their reason for holding. That argument lacks weight. It is very difficult for some people to break away from old habits and patterns of thinking about the stock market. Those who are unwilling to learn from market crashes are doomed to repeat the lesson.

A few years ago, investors were told that to buy and hold for the long-term was the wise course of action for investors because the long-term trend of the market is up. If you took any other approach, you were a speculator at best and a gambler at worst. Brokers and mutual fund managers were the most vocal proponents of this investment philosophy. The media also joined the chorus and the concept became a part of the "accepted" market lore. Investor thinking, in this regard, lost elasticity. What was overlooked was that selling a stock that has entered a phase of heightened risk actually reduces portfolio risk, whether it has been held a year or not. It is important for us to have clarity about the main issues relating to the length of an investor's holding period.

The new volatility of the market is probably here to stay. The current reality of the market is that in a given year stocks will often undergo multiple price swings in which the magnitude of those short-term swings is often equal to or greater than the magnitude of its 1-year price movement. Even stocks that lose money if held for a year may be very profitable at several times during the year. Unless the long-term expected gain is much greater than the average return on stock investments, it is a high-risk gamble to retain a stock that has moved up 20% in only 2 months once its charted growth rate has started to show signs of breaking down. The probability is that holding on to such a stock to meet a 1-year long-term tax requirement will cost way too much. When stocks move up rapidly, it is common for them to vigorously and abruptly "correct" to the downside once they begin to break down. It's like a crowded auditorium in which someone yells, "fire!" Everyone wants out at once. Potential buyers then become like those outside the auditorium waiting to get in. When they see all the people rushing out in a panic, they naturally decide to wait and watch rather than entering. Thus, while the potential buyers wait, the stock plummets.