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Where are all the dividends going?

While many dividends are going or already gone, says this U.S. advisory, some companies are still working hard to keep the dividend.

In bad times, it is generally agreed that dividends are more valuable than ever.

The trouble is, they are also becoming scarcer than ever in this particular run of bad times.

That doesn’t mean investors should shy away from dividend-paying stocks. A cheque in the mail is always better than no cheque in the mail.

But it does mean looking carefully to be as certain as you can that your dividends will not disappear in a frenzy of cost cutting.

To get a handle on the situation, we turn to a leading U.S. advisory, Dow Theory Forecasts. This long-time observer of Wall Street gives us facts and figures on the shrinking of dividends.

Then it recommends five stocks that have raised their dividends in the past six months. Each is an example of the careful cash management that is the best guarantee of safe dividends.

By the way, the advisory publishes a list of 33 stocks it follows closely that have raised their dividends in the past six months. One of them is Canadian National Railway (TSX-CNR; NYSE-CNI). It is not featured in the advisory’s article, but it certainly makes the cut in ours.

This stock continues to get good reviews in a number of American advisories we follow, which can only be good for the shares.

Cash like sandbags

This advisory describes the dividend as “something of an endangered species,” as many blue chip companies in the United States either cut their dividends or scrap them altogether.

46 of the stocks on Standard & Poor’s 500 have cut their dividends this year. Those cuts account for a total decline of $42 billion in lost annualized dividends, more than the amount for all the cuts in 2008.

Rather than raising dividends, “companies are shoring up balance sheets and piling up cash like sandbags to keep from washing away.” (A poignant reference for Manitoba readers, to be sure.)

In fact, with the exception of financial stocks, S&P firms held 4 per cent more in cash in the latest quarter than they did a year ago — even though operating cash flow declined over the past 12 months.

Consider dividends as part of personal income, adds the advisory. Cash payments made by corporations to U.S. residents declined in every month from June 2008 through February 2009, sinking 9 per cent during the entire period. That’s a lot of money not going into investors’ pockets.

Against this sad backdrop, “companies that raise their dividends deliver a particularly strong statement about confidence in their financial strength or business prospects,” says Dow Theory Forecasts. Here are five of them — all of them dealing with a thorny marketplace.

Guarding the bottom line

Airgas (NYSE-ARG) is America’s biggest distributor of industrial, medical and specialty gases and the equipment needed to use them. It has raised its dividend every year since it first paid one in 2003, and the annual rate now stands at $0.64.

The shares have been dragged down with the market, but operations have held up well. Sales have been strong enough to let Airgas pursue its aggressive acquisition strategy. In fiscal 2009 (ended in March), it purchased 13 companies that add $200 million to annual sales.

The company lowered its profit guidance, but still expects 15 to 16 per cent profit growth. Even though Wall Street lowered its estimates, the shares have enjoyed a better-than-double-digit gain and now stand at $42.00. Airgas keeps paring away at costs, so that any fall-off in sales volumes will not drain off its cash. A good way to protect the dividend.

Questar (NYSE-STR) makes 30 per cent of its revenue as a natural gas utility in the western U.S. and the rest in energy exploration, production and pipelines. It has raised its quarterly dividend for each of the last 30 years.

Lower natural gas prices caused Questar to lower profit guidance for 2009, even though hedging and its status as a regulated utility give it some protection against price shifts. The company plans to drill fewer wells. Thus production should actually grow, another case of a firm guarding its bottom line jealously. The dividend is $0.50, the share price $31.08.

Sharing the wealth

Sigma-Aldrich (NASDQ-SIAL) sells chemicals to research labs, universities and industrial firms. While Wall Street analysts are blasting away at the estimates for many industrial companies, Sigma’s consensus estimate is actually going up.

Per-share earnings should rise 10 per cent this year, although revenue could be hurt by currency losses, since 65 per cent of sales come from foreign markets. The shares seem reasonably valued at 14 times expected earnings, says the advisory.

Sales, cash flow and earnings have gone up in each of the past six years, and the dividend has been raised for 18 years in a row. It stands at $0.58 and the share price at $44.25.

United Technologies (NYSE-UTX) is a classic case of a company that insists on sharing the wealth with its shareholders. Its various businesses — aircraft engines, heating and air-conditioning, elevators, helicopters and electronic controls — are all facing slackening demand. Profits will almost certainly fall this year.

But United continues to put cash in shareholders’ pockets. $1 billion is earmarked for the repurchase of shares this year. And it has raised its dividend every year since 1994.

“Cash flow consistently exceeds net income and dividend hikes should continue,” says the advisory. Sometimes a company’s long-term actions speak louder than its short-term woes. The dividend is a generous $1.54 and the shares are $49.52.

Then there’s Wal-Mart (NYSE-WMT) — there’s always Wal-Mart. In a “mostly dismal” retail sector, Wal-Mart’s size and strength are paying off. Even more affluent customers are turning to this big discounter for large ticket items. So profits are confidently expected to grow this year.

Although you might not have heard of Wal-Mart in 1974, that’s the first year it paid a dividend and it hasn’t let up since. The annual dividend is now $1.09 and the share price is $50.05.

Look at how a company performs in good times and bad. Does it cut the shareholders adrift at the first sign of trouble, or does it work hard to keep its balance sheet steady and its dividend intact? The difference is more important than ever.