Editor’s Note: Today Nathan Slaughter examines dividend cuts — the cases where a painful reset turns out to be the right medicine, and the stocks that reward patient holders afterward. There’s a parallel story at the other end of the spectrum: essential-service companies that have been raising their payout year after year without needing a reset at all. Our colleague Robert Rapier has covered exactly those businesses at Utility Forecaster since 1989, and some of the positions he still holds were entered in 1994. See how a rising dividend compounds over time →

Nobody likes dividend cuts. Just like nobody likes colonoscopies. But sometimes, they are just what the doctor ordered.

As the editor of a dividend-centric newsletter, I painstakingly monitor the financial health of my portfolio holdings, paying close attention to balance sheet stress and cash flow deterioration. Because when liquidity tightens and cash preservation becomes a priority, dividends are usually the first thing to get the axe.

After all, these distributions are voluntary… payroll and debt servicing aren’t.

Sometimes, we can see dividend cuts coming from a mile away. Payout ratios are stretched with no relief in sight. But every situation is different. Some resets are precipitated by external factors that appear rather abruptly. Others are driven by strategic shifts in capital deployment. In some cases, there’s not even a funding deficit (management simply sees a better use for some of the excess cash).

The market doesn’t always care about the reason(s) – at least not initially. There is typically a hostile kneejerk reaction to the news. It’s not just that stockholders are getting a pay cut; it’s the hard truth that slashed (or worse, discontinued) dividends are usually symptomatic of deep and protracted financial issues.

But once the dust settles, investors often recalibrate and realize that this short-term pain can be a long-term gain.

Back in July, Conagra Brands (NYSE: CAG) announced plans to cut its $0.35 per share quarterly payout in half. The writing was on the wall at that point. Shares of the packaged foods company had already spiraled from $19 to $14, sending the yield above 10% — a potential red flag.

But a funny thing happened. The stock actually rallied a bit higher on the news. That’s partially because the adjustment was long expected. But also, investors saw it as beneficial in the long run. The cut will save about $335 million annually. Some of that money will be redirected towards debt reduction; the rest will be used to reinvigorate core brands such as Marie Callender’s and Duncan Hines.

CAG has since bounced more than 12%.

Likewise, LyondellBasell (NYSE: LYB) slashed its sizeable dividend in half back in February amid a persistent down-cycle in the chemicals industry. But the company still intends to distribute a generous 70% of its future free cash flows. CEO Peter Vanacker sold it as a way to “better position the company to thrive once markets recover.”

The market agreed and has sent the stock up 20% since then.

And then there’s Intel (NSDQ: INTC). Not too long ago, the chipmaker was a mess. Cash flows were crumbling and the market was questioning dividend sustainability. The major ratings agencies piled on by downgrading the firm’s credit ratings, citing mounting foundry losses and weakening credit metrics.

Intel had already trimmed its annual dividend payout from $1.46 to $0.50 per share, but then suspended it altogether in August 2024. Management framed it as a “pause” that would give the business the cash needed to deleverage and execute its turnaround strategy, at which point dividends can be reinstated.

The shares plummeted on the news, falling below the $20 level. But once again, the difficult move proved to be the right one. Intel has since been one of the market’s best performers — delivering a 350% gain.

Which brings me to Community Healthcare (NYSE: CHCT).

Prior to its public launch in March 2015, the company had just $2,000 in cash on the balance sheet. But the IPO raised $136 million… and it hasn’t looked back since. Today, it owns a sprawling collection of nearly 200 properties in 34 states.

These facilities are leased to doctors, behavioral therapists, hospital systems and other healthcare providers. The portfolio encompasses everything from dialysis clinics to radiation treatment centers to long-term care facilities. The diverse tenant base includes well-known operators such as DaVita, Tenet, and HCA.

There is a focus on outpatient facilities (a faster-growing segment) based in small suburbs outside of big urban markets. Like Rogers, Arkansas, Lakeland, Florida, and Waukegan, Illinois.

Compared to major metro markets, these community centers often sell at lower valuations, meaning better returns for the landlord. CHT has built this $1.2 billion portfolio by acquisition and doesn’t engage in bidding wars. Most of its purchases were closed at reasonable prices providing 10% or better cap rate returns.

These leases now generate about $30 million in quarterly rental income. They also typically carry escalators that automatically bump rental rates by 2% to 3% annually. And as a real estate investment trust (REIT), most of the net proceeds are returned to investors.

CHT made its first dividend payment in August 2015 in the amount of $0.14 per share. And over the next decade, it raised the payout every 90 days – 40 consecutive quarterly hikes. Over that span, the distribution tripled to $0.45 per share.

It reached $0.48 back in May. But that’s when the streak came to an end. Last month, the board cut the payout by one-third, reducing quarterly distributions to $0.33 per share.

This “reallocation” will free up approximately $30 million over the next two years. Management intends to reinvest that cash in improvement projects aimed at boosting flagging occupancy rates. It will also give the company more flexibility to pursue attractive acquisition targets. There is a large pipeline of fully leased properties that could yield 10% or better returns.

In other words, shareholders are being asked to trade some of today’s income to fund tomorrow’s growth.

Notice the word “some”. After this adjustment, the company will be distributing about 60% of its adjusted funds from operations (AFFO). And the annualized payout of $1.32 per share still provides a hefty yield of close to 9%.

It may taste foul, but this dividend reset should make an effective medicine.

The dividend discipline at the heart of today’s article — sustainable payout ratios, income that earns the right to grow, management willing to reallocate rather than overpromise — is exactly what our colleague Robert Rapier looks for when he builds the Utility Forecaster portfolios. While Community Healthcare Trust is resetting its distribution to fund the next chapter, Robert holds essential-service businesses that have been raising their payouts without interruption, some since positions were entered in 1989 and 1994. After enough years of consistent raises, the income on what you originally paid stops resembling the yield you bought at. See how Robert finds and holds these companies →