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Income investors hate dividend cuts. Why they could provide an attractive opportunity in some cases

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Dividend stocks usually take a hit when they decrease their payouts, but investors may not want to count some of them out, according to Morgan Stanley. Companies typically slash dividends as a result of financial strain or in the face of economic headwinds. In the six months following those announcements, history has shown that investors dump the stocks, the bank found. Yet after the initial reaction is priced in, there could be an attractive entry point in certain names, said strategist Todd Castagno. “In the 6-months following a change in regular quarterly dividend policy, we found companies that announced a dividend cut of more than -25% underperformed the market by -1,200 bps, on average, while smaller dividend reductions outperformed by +480 bps, on average,” he wrote in a note Wednesday. One year after announcing a dividend reduction, those that cut these payments by 30% or less outperformed the market by 1,900 basis points and cuts deeper than 30% underperformed by 1,800 basis points, on average, Castango said. One basis point is equal to one one-hundredth of a percent. The firm analyzed Russell 1000 dividend-paying companies that cut their dividends from 1962 to 2024. Over past year, dozens of stocks have decreased their payouts. Morgan Stanley came up with a list of 30 names, excluding select companies in the financials, utilities and real estate sectors, that announced a quarterly dividend cut during that time. While many companies instituted large dividend decreases, there are several that announced dividend cuts of 30% or less. Here are some of those stocks. Almost a year ago, real estate investment trust Annaly Capital Management said it would cut its dividend to 65 cents a share from 88 cents per share, representing a 26% quarter-over-quarter decrease, Morgan Stanley noted. CEO David Finkelstein said in a statement at the time that management was reducing the dividend to be in line with the company’s historical yield on book value. He added that the move “allows us to appropriately manage the portfolio within conservative risk parameters while also delivering a more sustainable yield that is competitive with our peers as well as broader fixed income benchmarks.” Shares of Annaly are up 1% in 2024, and the dividend yield is 13.3%. Meanwhile, Southern Copper slashed its dividend to 80 cents per share from $1 earlier this year. That’s about a 20% quarter-over-quarter decrease, per Morgan Stanley. The stock is about flat in 2024, and it yields more than 4%. “The board looks at how the market is, what are the next payments that the company has to do, what are the investment requirements,” said Raul Jacob Ruisanchez, Southern Copper’s chief financial officer, during the company’s fourth-quarter earnings call in February. “Our cash generation from operations was somehow lower. So the board decided to cut a little bit … the dividend in order to maintain a solid cash position for the company.” In the case of Danaher , it announced a 11% quarter-over-quarter dividend-per-share cut in December, from 27 cents to 24 cents . However, in late February the medical products company said it would increase the dividend back to 27 cents , payable on April 26 to holders of record as of March 28. Shares are up 10% this year, and they offer a dividend yield of 0.4%.

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