MW Why dividend-stock investors can breathe easier after the U.S.-China tariff truce

By Paul Brandus

Trump avoids repeating Herbert Hoover's Smoot-Hawley tariff mistake - for now

Stock dividends could be in the crosshairs as companies struggle to maintain profit margins. Automakers are particularly at risk.

The president ran for office promising to "make America great again," and months after being sworn in, raised tariffs against America's trading partners.

President Herbert Hoover, that is - whose own "MAGA" slogan helped him win the White House in 1928. When the U.S. stock market crashed seven months after he took office - the curtain-raiser for the Great Depression - Hoover dismissed the pleas of more than 1,000 economists and decided that stiff tariffs against America's trading partners would help turn things around.

Many business executives tried to talk Hoover out of it. Henry Ford, the founder of the car company that bears his name, went to the White House to plead with the president personally, urging him not to sign a tariff bill - the now infamous Smoot-Hawley Tariff Act - which Ford considered "an economic stupidity." Hoover signed it anyway. "With returning normal conditions, our foreign trade will continue to expand," the president insisted.

In the ensuing cataclysm, trade collapsed as Hoover learned that other countries could hit America with tariffs too. Imports and exports shriveled; so did corporate profits. To maintain their margins - or try to - companies began slashing dividends. In 1929, the year the Great Depression began, U.S. companies paid out $5.8 billion in dividends. Just three years later, payouts had fallen to about $2.1 billion - a drop of almost 64%, according to U.S. Department of Commerce data and academic research by economists Jeremy Siegel and Robert Shiller. According to Siegel's book "Stocks for the Long Run," payouts, on a nominal basis, would not return to their 1929 level until 1955-56.

The Washington-Beijing spat isn't over - far from it.

Fortunately, this isn't 1929. Fears about the length and severity of an economic downturn have been eased by the news that the U.S. and China are climbing down from what was shaping up to be a nasty and painful standoff for companies, investors and consumers. The risk-on trade is back, at least for now.

But the Washington-Beijing spat isn't over - far from it. This "deal" is merely a 90-day timeout, while both sides continue to discuss their differences. While they do, the 145% U.S. tariff on Chinese goods will be lowered to 30%. China looks to be making the bigger climbdown, cutting its import duty on American goods to 10% from 125%.

Yet depending on the length and severity of the tariff war between the United States and much of the world, stock dividends could again be in the crosshairs as companies struggle to maintain profit margins. Let's see what happens over the next 90 days.

Dividends at risk

Meanwhile, what are the warning signs that stock-dividend cuts could be in the offing? Companies pay dividends from free cash flow, and if that is declining, the payout could be in trouble. Are earnings enough to cover the payout? The higher the "coverage ratio," the better.

There are different tiers of dividend payers. At a minimum, companies that have demonstrated a long-term commitment to dividends, particularly those who raise them each year - so-called "dividend aristocrats" - may continue to raise payouts, but at a slower pace. Other companies hike dividends during times of economic growth but hold them steady at other times.

But actually cutting payouts? Look no further than dividend payers that have suspended or watered down their financial outlooks for the rest of 2025 and beyond because of uncertainty over President Donald Trump's tariffs.

One sector clearly at risk is automakers. Ford $(F)$ just suspended its guidance, saying it can't predict the full impact of Trump's tariffs on its business. The move came after crosstown rival General Motors $(GM)$ trimmed its annual outlook for the same reason. Another major automaker, Stellantis $(STLA)$, the owner of Chrysler, Dodge, Jeep and other brands, has also scrapped forecasts.

Even before Trump's so-called liberation day announcement on tariffs April 2, automakers had been struggling. Ford's first quarter was rough, with net income and adjusted pretax income both dropping by more than 60% from a year ago. It now sees a $2.5 billion hit from tariffs, which would more than eat up the $2.4 billion Ford spends on dividends. Stellantis, meanwhile, has halted share buybacks, a clear effort to preserve cash.

GM looks better positioned to ride out the storm, depending on the length and severity of the tariff war. Its quarterly dividend of 15 cents (a dividend yield of about 1.25%) appears better covered at present, and the payout ratio (the percentage of a company's net income that is paid in dividends) is a low 9%. Even so, the company estimates that Trump's tariffs could cost it up to $5 billion. GM has also paused share buybacks.

Dividend payers in other industries are at risk, too, for different reasons. Tariffs could lead to loan defaults and losses for banks, for example; as is the case for the automakers, the need to maintain margins could result in dividend cuts. Banks have been known to cut dividends when the going gets tough, as happened during the 2008-09 financial meltdown, when Bank of America $(BAC.SI)$, Citigroup (C) and Wells Fargo $(WFC)$ slashed or suspended payouts.

Since tariffs will impact any company with significant supply-chain exposure, the question of whether dividends will be cut could depends on many factors: free cash flow, debt and how it is being serviced, credit ratings and more - in general, overall balance-sheet strength. The news that Trump and China's Xi Jinping are both backing off is encouraging. But again, the main determinant is just how long Trump continues this tariff war with the rest of the world and how stiff the levies on others will be - and vice versa.

More: The stock market is cheering the U.S.-China trade deal, but the damage is done

Plus: U.S.-China trade deal: Cars, steel, drugs won't get a break from tariffs

-Paul Brandus

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May 12, 2025 15:21 ET (19:21 GMT)

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