dividends in America

AIG nearly went out of business in 2008. In nine months, the world's largest insurance company lost more money than it made in the previous 18 years combined.

But something strange happened: During most of this meltdown, AIG kept raising its dividend payout. Three times, in fact. In a year that erased nearly two decades of profits, AIG paid its shareholders $2.1 billion in dividends. It wasn't until the company was taken over by the U.S. Treasury that dividends finally ceased, by congressional order.

"We are being asked why we raised the dividend," former CEO Martin Sullivan said during a conference call in May 2008, after reporting a record loss. "The answer is that the dividend increase is a reflection of ... management's long-term view of the strength of the company's business."

I'm picking on AIG, but this kind of thinking isn't unusual among CEOs. Companies will jump through hoops to avoid cutting their dividends. In aggregate, there's only one clear trend in dividends: They usually go up. Since 2004, S&P 500 companies have raised their quarterly dividends 2,854 times, cut them 168 times, and stopped paying them just 46 times, according to Standard & Poor's. Forty one S&P 500 companies raised their quarterly dividends last month. One company cut its dividend.

This behavior oddly unique to America. Deutsche Bank published a report last decade asking global CEOs how they thought about dividends. Most managers from Europe, Asia, and South America took a pragmatic approach to dividends, and were more than willing to adjust payouts when their earnings were volatile. But American managers responded overwhelmingly that cutting a dividend was to be avoided at almost all costs.

It's also a new phenomenon. While reading old finance books, I kept coming across references to investors dealing with the ups and downs of dividends. Yale economist Robert Shiller's database of historical stock returns shows that dividends were wildly volatile. From 1871 through 1920, aggregate dividends fell in more than one-third of all months. From 1920 to 1950, dividends were cut in 23% of all months. Since 1980, they've declined in less than 10% of all months. The era of stable dividends is unique to the last 30 years.