GE's Dividend Cut

Last month, General Electric (NYSE: GE) CEO Jeffrey Immelt seemed to be favoring maintaining the firm's dividend over its solid AAA credit rating. But he recently announced that the company would cut its dividend by two-thirds, from 31 cents to 10 cents per share.

The cut had already been expected by many investors. Even at 10 cents, the annual dividend yield is around 4 percent, about 1 point above the 10-year Treasury yield.

The cut will produce cash savings of about $9 billion annually, reassuring the credit rating agencies that monitor (and recently downgraded) GE.

Immelt is eating a little crow now, but he's at a crowded banquet. The list of companies that have cut their dividends recently reads like a who's who of corporate America (admittedly, many of them are financials), including Bank of America, Dow Chemical and Motorola.

The lesson here is that CEOs are having as much difficulty wrapping their heads around the magnitude of the current crisis as anyone else. Investors can't rely on executives' reassurances that a company will maintain its dividend, as these may not be based on an objective assessment of economic fundamentals. However, the numbers don't lie: Dividend-oriented investors must be extra diligent in analyzing a firm's financial position and earnings power through the downturn. It's the only way to avoid being faked out by an overly optimistic CEO.