2019 was a record year for dividend payments from publicly-traded U.S. corporations. In 2019, U.S. companies paid $491 billion in dividends. At the start of this year, the expectation was that payouts would top $500 billion for the year, but the federal and state government shutdowns of much of the economy has changed those expectations. Over the past two months, the number of dividend reductions and suspensions are the most since 2009.

On April 28, the Wall Street Journal reported a total of 216 reduced or canceled dividends. The breakdown was 135 decreased, and 81 suspended. There have been more dividend reduction announcements in the few days, as we move fully into the 2020 first-quarter earnings season.

Here are some of the name brands that have slashed or suspended dividend payments:

• Ford Motor Company (F): Dividend suspended.
• General Motors (GM): Dividend suspended.
• Harley-Davidson, Inc. (HOG): Dividend slashed by 95%.
• The Boeing Company (BA): Dividend suspended.
• Royal Dutch Shell plc (RDS.A): Dividend reduced 66%. First dividend cut since World War II.

For investors that depend on dividend income, the cuts are brutal. With hundreds of companies that have announced dividend reductions, or soon will, it is hard to know where to invest. In these crisis days, I divide dividend-paying stocks into three categories.

First up are the companies that continue to pay regular dividend rates through the crisis. These are the companies with conservative balance sheets, businesses that sustain themselves throughout the crisis, and boards of directors that believe in taking care of shareholders. These are the stocks you want to buy or add shares during this market downturn. One example from my Dividend Hunter newsletter is ONEOK, Inc. (OKE). Historically, OKE was priced to yield around 5%. Now it yields 12%.

Next are companies that likely could continue to pay their regular dividends, but have decided instead to be careful and conserve cash until there is a better idea of when the crisis will end. With these companies, you can expect the dividend to quickly recover when the economy gets back to something that looks like normal. New Residential Investment Corp (NRZ) is a stock in this camp. Out of caution, NRZ cut its common stock dividend by 95% at the start of the crisis. I expect the dividend rate will quickly ramp up post-crisis.

The final group is those companies whose business operations have been mortally wounded by the coronavirus-triggered economic shutdown. The companies in this group may be forced to negotiate with creditors to stay afloat or even declare bankruptcy. There will not be free cash flow to pay dividends again for many years, if ever. Types of companies in this category include upstream energy companies, cruise lines and airlines, and the auto manufacturers. See list above for examples.

The COVID-19 pandemic will have lasting effects on business and the economy. You do not want to hold on to stocks in the third group with the hope the share prices will soon recover—it will not happen. And even some great long-term dividend stocks may not be able to return to their former dividend payment levels. However, companies in the first two groups are in a good position for both increased dividend payments and share price appreciation when the economy is open again for business. Use these category classifications to help you decide which dividend stocks to prune and which to add to your income-focused investment portfolio.

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OKE shares closed at $27.94 on Friday, down $-1.99 (-6.65%). Year-to-date, OKE has declined -61.38%, versus a -11.62% rise in the benchmark S&P 500 index during the same period.

About the Author: Tim Plaehn

Tim is the lead income and dividend investing analyst at Investors Alley. He is the editor for The Dividend Hunter, a popular investment research advisory focusing on high-yield dividend stocks for investors who want a steady and growing income. Prior to joining Investors Alley Tim was a stock broker, financial planner, and F-16 fighter pilot and instructor in the U.S. Air Force. More...

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