Companies are cutting dividends to cope with the economic fallout from the coronavirus. The S&P 500 Index (NYSE: SPY), which tracks companies that have annually increased their dividends over the past 25 years, has fallen 19% so far in 2020.
The dividend cuts and suspensions announced in the past month were a sign of a prolonged drought. Goldman Sachs (NYSE: GS) is predicting a second-quarter output of 34%. This is worse than what happened to the economy from 2007 to 2009 and that recession dragged down the S&P 500's dividend to 25%.
The S&P 500 companies that have suspended their dividends this month include cruise line operator Carnival (NYSE: CCL), cosmetic company Estee Lauder (NYSE: EL), hospital firm HCA Healthcare (NYSE: HCA), Hilton Worldwide Holdings (NYSE: PK), retailer Kohl's (NYSE: KSS), and casino operator Las Vegas Sands (NYSE: LVS).
The $2 trillion Cares Act says that companies that borrow money from the government can't buy back their shares, pay a dividend, or make any capital distributions until 12 months after the loan is paid in full.
"In times like these, financial strength and dividends are two of the critical components in making your investment selections," said Alan Lancz, president of investment advisory firm Alan B. Lancz & Associates Inc. "It's not just the dividend yield, but the sustainability of that dividend."
A significant number of Wall Street investors view dividends are a crucial part of stock ownership. However, 30% to 50% declines even with the modest yields of 4% to 6% still have a lower cash flow output.
"Risks seem contained for the S&P 500, and show up in the obvious, most stressed industries: Energy and Consumer," said Savita Subramanian, head of U.S. equity quantitative strategy at Bank of America. "For more conservative investors, we suggest a focus on our secure dividend screens. For more aggressive investors, it is worth considering that the market is discounting more cuts than we think is likely."