March 10, 2009

Capital One Financial joined the parade of financial institutions slashing their dividends on Monday, yet its shares jumped 5 percent. Wells Fargo shares are up 23 percent over the past two days despite an 85 percent dividend cut Friday.

Normally, investors react negatively to dividend cuts because they are an important source of returns. Over the long term, about half of the return from stocks comes from share-price appreciation, and the other half comes from dividends, assuming they are reinvested in more shares, according to David Darst, chief investment strategist with Morgan Stanley's Global Wealth Management Group.

A long history of dividend payments is also seen as a sign of financial strength. So why did Wells Fargo and Capital One shareholders shrug off their dividend cuts? One reason is that they were widely expected. Wells was the last of the large banks to chop its payout. Also, the economy has gotten so bad that investors will accept, or even welcome, a dividend cut if they think it will boost a company's chance of survival.