BP Dividend Under Pressure
BP's board of directors met on Monday to discuss the future of the firm's increasingly controversial (and increasingly fat) dividend. Because of BP's continually plunging stock price, its 56 cents-a-share payout now equals an effective yield of almost 10 percent. But don't expect that to last long enough to pay for your next pack of gum.
The oil giant is under pressure from President Obama, House Speaker Nancy Pelosi, and pretty much anyone who isn't a shareholder to stop paying its dividend until it pays all of the watermen, hotel owners, energy workers, and others damaged by its mother of all oil spills. But the firm is loathe to cut its payout for fear of losing even more investors and market share.
BP isn't expected to announce a decision until later this week, after its top executives meet with President Obama (and after he goes on television tonight to berate BP publicly.) But the firm is reportedly weighting three options: (1) suspending its dividend; (2) paying the dividend in BP shares, instead of cash (ha!); or (3) paying the dividend into an escrow fund to be distributed to shareholders after the cleanup is complete. Um... when will that be? Just asking.
Dividend-loving investors who own other high-yielding stocks may be wondering if this means their quarterly checks are at risk, too. The answer is yes, but only in extreme cases. Firms tend not to cut their dividends just because business is slow, but they do if they are faced with big trouble. In 2009, most of the big banks cut or eliminated their dividends, and for the most part they haven't come back. Double-digit dividend yields as high as 38 percent (yikes!) seem highly risky, a sign that a company's investors are abandoning it or other problems lurk.
But a tasty 3 percent to 4 percent dividend, on a bedrock consumer products company like Proctor & Gamble or Kraft (as recommended by Warren Buffett) seems like a safer bet for long-term investors.
There is one other risk for dividend-lovers. Until the end of 2010, the top income tax rate on dividends is 15 percent. Unless there is new tax legislation to extend it into 2011 and beyond, dividends will be taxed as ordinary income in the future (as they were before 2001.) There's broad agreement in Washington that it should be extended, but there's broad agreement in Washington that something's got to give on the deficit, too. And that means there are no guarantees. Not for BP shareholders, and not for anyone else who counts on stock yields to pay their bills, either.
Photo by See-ming Lee on Flickr.
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