Recent news regarding stock dividends is not encouraging.

Standard & Poor’s 500 Index companies cut dividends at a record 62 times in 2008, resulting in a loss of nearly $41 billion. S&P reports that another $30 billion in S&P 500 dividend cuts occurred just in the first two months 2009, surpassing the previous quarter’s record total.

Are dividends still a good source of income, even though more and more industry giants are cutting them? What does it mean for a company to cut or eliminate its dividend? Can you predict how long dividends will last for your stocks? Where can investors go for a similar, reliable income when their dividends are cut?

Be Prepared

1. No simple solutions
2. What to do if your dividends have been cut
3. Predicting the cuts before they occur
4. Perspective is key
5. Don’t dump equities
6. Take the long view

No simple solutions

Richard Hisey of AARP Financial, Tewksbury Mass., says that a dividend reduction should be a warning sign for investors. “Just because someone cuts the dividend doesn’t mean you have to jump to a conclusion.” It could be an indication of danger, or it could just be a prudent move.

Dividends allow a company to share its profits with shareholders. Some companies pay large dividends to shareholders because they have extra money. Some companies pay small or no dividends, because they do not have enough cash to distribute.

Joseph J. Virostek Jr. is vice president of BPU Investment Management’s investment operations in Pittsburgh.

If companies cut dividends, this is merely a sign of a new fiscal policy. The companies suddenly have to keep their capital. Hisey suggests that it’s worth wondering why. Other possible reasons, he says, include:

• They are investing more money in developing new products, building plants or buying competitors.
• Perhaps they have incurred excessive debt.
• The company is struggling to maintain its stock value or with declining earnings.

What to do if your dividends have been cut

You should first look at the announcement of the dividend reduction. Normally, it’s posted on the Internet. If you cannot find it on the Internet, ask your broker or investor relations to provide it.

Understand the exact reason for the cut. Is the management able to explain their reasons in a logical way? Are there cash flow problems? Are they temporary or long-term?

You can also find these documents online or by calling your broker or investor relations. You can also find them online, or by contacting your broker or investor services. You can find the stock symbols on the Internet by going to Yahoo Finance and clicking “Key Statistic.”

You can also visit the Corporate Filings page on the U.S. Securities and Exchange Commission website.

You should assess debt levels in both locations. Scott Schluederberg manages Hardesty Capital Management’s diversified high yield dividend portfolio in Baltimore. If not, it could put the company in danger.

He says that if a company has a high level of debt and suffers subsequently from lowered earnings, they will have to spend too much money to keep up with their debt payments. This will reduce the dividend.

Other possible reasons for dividend reductions should be considered. Dividend reductions have been particularly hard on the financial sector. The reason for this is that institutions receiving federal bailouts must use the extra money to lend while reducing dividends and other payouts.

Predicting the cuts before they occur

A company’s business model should be considered, as well as its ability to generate a steady stream of revenue that is recession-proof. Schluederberg favors companies who offer services people need, rather than those who require “big-ticket discretionary purchases that most consumers can delay.”

Investors with a high level of sophistication can look at analysts’ expectations for earnings. Opinions may differ widely, even if you find them.

Jonas Elmerraji is a portfolio manager and editor at The Rhino Stock Report in Hagerstown. He says that it’s important to look beyond the current net income of the company to see if they can afford to pay their next dividend.

It is not necessary to conduct such thorough research all the time. Dividend reductions are often easy to predict.

If you hear that your company has just lost $2 billion in revenue, then you can expect them to cut or eliminate their dividends soon.

Woerheide advises investors to follow two simple rules when it comes to dividend distributions.

1. Dividends almost always follow a predetermined schedule. A late payout can be a sign of potential problems.

2. The majority of dividend-paying firms increase their payouts annually, and in most cases at the same time every year. If the date has passed and the dividend is not growing as much as it usually does, this could indicate a cut.

Perspective is key

Keep perspective. Yixin Liu is an assistant professor of finance and economics at the University of New Hampshire. She says that since decades, the number of companies paying dividends has been decreasing. She says that in 1980, 64 per cent of U.S. companies paid dividends. But 25 years later, only 41 percent still did. Although the dollar value of dividends may seem low, it has actually been increasing.

Roger Young, portfolio manager and analyst at Miller/Howard Investments of Woodstock, N.Y., says that the headlines may make it seem like everyone is cutting their dividends.

Capital IQ (a division of Standard & Poor’s) reports that while 485 U.S. firms cut their dividends in the past year, 1,744 increased theirs.

Don’t dump equities

You should look for dividend-paying stocks before switching to other asset classes, such as money-market funds and bonds.

Bill Staton is the author of “Double Your Money In America’s Finest Companies.”

There are many reasons to not sell your stocks. They have lost a lot of value. Staton says that you do not want to miss the opportunity when the market recovers.

The pursuit of dividends remains a solid investment strategy. It’s probably even more wise than before.

Thomas Forsha is vice president of River Road Asset Management, Louisville, Ky. and co-manager for the Aston/River Road All-Cap Dividend Value Fund, which has a $63 million market cap.

Dividends have a tremendous impact over the long-term. If $10,000 was invested in the S&P 500 back in 1972, it would now be worth $208,972 if dividends are reinvested. It will only be $74,547 if they are not. This is according to David Grenier, President of Cutler Capital Management, Worcester, Mass.

You can’t count on all companies to stay the same course, even if they have increased or maintained dividends.

The management knows that positive announcements of dividends will attract investors and increase the stock price just as much as negative announcements. Mary Harris, associate professsor of business administration at Cabrini College, Rednor, Pa., advises that it is always wise to look closely at the financial data.

She says that companies that increase or maintain their dividends are sending the message that they have a good cash position. It’s still not a sure sign.

Take the long view

Credit crunch will likely lead to more dividend cuts. Holding onto money helps improve creditworthiness. Companies have a hard time borrowing, so holding on to their money is a good idea. The current stock valuations make it impossible to do a secondary offer. They have nowhere else to turn but their shareholders.

Peter Miralles is an advisor at Atlanta Wealth Consultants. A financial management company. He says that cutting the dividend from the company’s perspective is prudent cash management.