2022’s Safety Net Dividend Cut Roundup

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I’ve been searching long and hard to bring investors good news this year. This week, I finally found some.

It has been a banner year for dividends. In fact, 2022 is set to break records.

Cash dividend payouts in 2022 are expected to jump 10% over last year’s. Next year, cash payouts are expected to rise even more, albeit at a slower rate.

Unfortunately, dividend cuts are accelerating too. During the 12 months ending September 30, 2022, 232 companies decreased their common and/or preferred stock dividends. That’s up 31% from the same period in 2021, when 177 companies cut their payouts.

Today more than ever, dividend safety is a key weapon in the fight to protect your portfolio. This year, Chief Income Strategist Marc Lichtenfeld’s Safety Net column has predicted a number of dividend cuts. Some of them have been downright disastrous.

Let’s finish the year by revisiting some of his best calls with a “Safety Net Dividend Cut Roundup.”

A Dividend So Not Nice, We Wrote About It Twice

When we wrote about Lumen Technologies Inc. (NYSE: LUMN) back in March, it had an oh-so-enticing 9.34% dividend yield. However, we said the outlook for the “F”-rated telecommunications company over the next year was “bleak to say the least.”

The company was trying to sell some of its dying businesses, such as traditional phone services, so it could focus on its broadband business. Lumen was beginning to feel the pain of selling off $10 billion worth of assets as its free cash flow began to decline rapidly.

Lumen was a serial dividend cutter. Its dividend, we said, was anything but safe.

Fast-forward six months to September, when Marc wrote about Lumen again.

This time the company was sporting an even bigger 12.3% yield. It had just brought on a brand-new CEO who had yet to declare her dividend intentions.

Marc said it wasn’t hard to imagine her cutting the dividend if free cash flow continued to deteriorate while she executed her turnaround plan.

He was right.

On November 2, as part of its third quarter earnings release, Lumen revised its capital allocation policy and eliminated its dividend.

The company also missed analysts’ earnings expectations, and its stock plunged nearly 18% in one day on the news.

As of this writing, shares are 24% lower than they were on November 1, and Lumen investors don’t even have a dividend stream to show for it.

An Oversize Dividend That Was Full of Ship

In November, Marc reviewed the dividend safety of Israeli shipping company Zim Integrated Shipping (NYSE: ZIM).

At the time, the company had paid out $27.10 per share over the prior 12 months, giving it a mind-blowing 100% dividend yield.

Marc assured readers it was real. He was also certain that it wouldn’t last.

In fact, he gave it an “F” rating and called a dividend cut “almost a sure thing.”

Once again, Marc was right.

On the very day that his Safety Net article was published, Zim declared a $2.95 per share quarterly dividend. It was 38% lower than the $4.75 per share dividend it distributed in the prior quarter.

Now, although Marc was right, he wasn’t necessarily psychic.

Zim has a publicly stated dividend policy that anyone can read. The shipper pays out 20% to 30% of its net income during the first three quarters of the year with a possible step-up to 50% in the fourth quarter.

Net income is expected to fall significantly over the next two quarters, which means the dividend will decline too.

As long as Zim remains profitable, investors can expect to receive a healthy dividend – just not as large as it was over the last 12 months.

This is a good example of a very important lesson that all dividend investors must learn…

If a dividend yield looks too good to be true, it probably is.

“D” Is for Dodgy Dividend

It’s not just the “F”-rated stocks dividend investors need to watch out for. Dividends with “D” ratings aren’t safe either.

“D”-rated Chimera Investment Corp. (NYSE: CIM) proved my point when it cut its quarterly dividend by 30% in September from $0.33 per share to $0.23 per share.

Shares of the mortgage real estate investment trust (REIT) plunged 9.5% on the news.

Marc warned readers in March that he suspected another dividend cut may be on the horizon.

Mortgage REITs borrow money in the short term and lend it out in the long term at higher rates. The difference is called net interest income (NII), and it’s the way we determine a mortgage REIT’s ability to afford its dividend.

Chimera’s NII is inconsistent. While Marc said he would prefer to see it grow every year, Chimera has been unable to do that.

He also said that the mortgage REIT has a “dodgy dividend history” with a habit of cutting the dividend when times get tough.

Times got tough again… and Chimera made the cut to its dividend.

Well, that’s all for 2022. Marc will be back next week with a new Safety Net analysis.

I wish you all a happy, healthy and prosperous 2023!

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