Putnam
Dividend
Income Fund
ANNUAL REPORT
June 30,1994
(Balance Scales)
BOSTON-LONDON-TOKYO
<PAGE>
Performance highlights
Morningstar, an independent mutual fund research firm, noted in its 5/6/94
analysis of Putnam Dividend Income Fund that "this fund's defensive stance
and solid dividend make it quite tempting now; even non-corporate investors
might find it a good deal."
The Scott Letter, a closed-end fund investment newsletter, noted a BUY
recommendation for this fund in its July/August 1994 issue which examined 28
specialized equity funds based on net asset value as of 5/8/94.
Performance should always be considered in light of a fund's investment
strategy. Putnam Dividend Income Fund is for investors seeking a high level
of current income, tax advantaged for eligible corporations consistent with
preservation of capital through a diversified portfolio of preferred and
common stocks.
FISCAL 1994 RESULTS AT A GLANCE
<TABLE>
<CAPTION>
Total return (common shares): NAV Market price
<S> <C> <C> <C> <C> <C>
...............................................................................................
12 months ended 6/30/94
(change in value during period plus
reinvested distributions) -0.66% -6.78%
Share value: NAV Market price
...............................................................................................
6/30/93 $12.39 $11.875
6/30/94 10.84 9.750
Capital gains(1)
Distributions: Long- Short-
No. Income term term Total
..............................................................................................
Common shares 12 $1.044 $0.325 $0.058 $1.427
Current return: NAV Market price
...............................................................................................
(end of period)
Current dividend rate(2) 7.20% 8.00%
Taxable equivalent
(for corporate investors)(3) 9.91 11.02
</TABLE>
Performance data represent past results. For performance over longer periods,
see pages 8 and 9.
(1) Capital gains are taxable. Investment income may be
subject to state and local taxes.
(2) Income portion of most recent distribution, annualized and divided by NAV
or market price at end of period.
(3) Assumes a corporation taxed at the 35% federal tax rate and that 100% of
the fund's distributions qualify for the 70% corporate dividends-received
deduction. For some investors, investment income may also be subject to the
federal Alternative Minimum Tax.
<PAGE>
From the Chairman
Dear Shareholder:
(Photo of George Putnam)
(c) Karsh, Ottawa
The world's financial markets traversed a somewhat erratic course during the
first six months of 1994, a reminder that markets are always shifting and
sometimes do so dramatically. Even though most of these markets are now
demonstrating more stability, a lingering nervousness seems to ignore the
strengthening fundamentals emerging in the world's major economies.
In the United States, which has the most mature recovery, higher interest
rates have successfully quelled inflation with no evidence yet of a harmful
slowdown in business. Healthy corporate earnings levels offer more positive
news. In Japan and Europe, the beginnings of an equally inflation-free
recovery appear to be taking hold.
We believe the current nervousness overanticipates future interest rate
increases. But the dollar now poses a new concern as it loses ground to other
currencies. In Putnam Management's view, if the dollar continues to slump and
the economy fails to slow to a sustainable rate, we may see another rate
increase in response.
Experienced investors know the markets will take time to settle down.
Meanwhile, we should point out that declines in the market have traditionally
paved the way for gains that more than made up for losses in a downturn.
Respectfully yours,
(Signature of George Putnam)
George Putnam
Chairman of the Trustees
August 17, 1994
<PAGE>
Report from the fund manager
Jeanne L. Mockard
The great bull market for fixed-income investments came to an end last
October, but it wasn't until February of this year that the proverbial last
shoe dropped. On February 4, 1994, the Federal Reserve Board, in an attempt
to restrict what some considered an overly accommodative monetary policy,
made the first in a series of increases in the federal funds rate. This rate,
the bellwether for all short-term interest rates, is the rate charged on
interbank overnight loans. The increases sent U.S. financial markets into
something of a tailspin, and have presented income investors with challenges
that became unfamiliar over the favorable market environment of the past
three years.
Putnam Dividend Income Fund's performance was affected by these events, as
reflected in the summary on page 2. However, the fund held up relatively well
compared with many of its competitors. This relative outperformance is
attributable to several defensive measures taken by Putnam Management in
anticipation of the market downturn.
LEVERAGE REDUCED SUBSTANTIALLY; DIVIDEND
MODERATELY AFFECTED
The fund has maintained a leveraged component in the portfolio throughout its
history. The interest rate environment of 1991-1993, with its wide spread
between short- and long-term rates, was ideal for leverage. The fund was able
to borrow money at low short-term rates and reinvest it at higher long-term
rates, profiting from the difference between the two.
Eliminating two thirds of the fund's leverage was our most important
strategic response to rising interest rates. In late 1993, sensing that
interest rates had bottomed, we began making plans to reduce the fund's
reliance on these techniques. We completed the first reduction of $24 million
in January. However, in order to protect the fund from further increases in
short-term rates, we reduced the leverage in June by another $25 million. By
the end of June, we had reduced the fund's total leveraged position to $25
<PAGE>
million or 18% of the portfolio, compared with $74 million or 36% of the
portfolio at the end of 1993.
Thus far, the reduction in leverage has resulted in only one modest reduction
in the fund's monthly dividend. A 1 cent reduction accompanied the initial
decrease in leverage. June's decrease did not necessitate another dividend
reduction because the fund's portfolio earnings continued to cover current
payment levels.
The fund continued to provide 100% qualifying income for the 70% corporate
dividends-received deduction, maintaining a significant tax advantage for our
corporate shareholders. (The current dividend rate and its taxable equivalent
for corporations can be found on page 2.)
DEFENSIVE HOLDINGS INCREASED
In addition to leverage reduction, another part of our defensive game plan
was to reduce the fund's perpetual preferred stock holdings and replace them
with sinking fund and adjustable-rate preferred (ARP) stocks.
Although technically an equity security, a perpetual preferred stock behaves
like a fixed-income investment because of its fixed dividend rate. The word
"perpetual" indicates the absence of a maturity date. In a rising interest
rate environment, perpetual preferreds will tend to be more volatile than
securities offering some assurance of future redemption.
(Bar Chart of Top Industry Sectors)
Top Industry Sectors
<TABLE>
<S> <C>
Electric utilities 34.9%
Banks 18.7%
Combined utilities 17.1%
Insurance 6.7%
Oil services 6.0%
</TABLE>
Industry breakdowns reflect both common and preferred stock holdings. Based
on net assets on 6/30/94.
<PAGE>
Sinking-fund preferred stocks provide that assurance. They contain provisions
requiring the issuing corporation to set aside funds periodically to retire
the issue at some future point. This de facto maturity gives them greater
stability than a perpetual preferred. As of June 30, 1994, 28% of the fund
was invested in sinking-fund preferred stocks.
Adjustable-rate preferred stocks tend to be even more stable than
sinking-fund preferred stocks in rising rate environments, because ARP
dividends adjust periodically to reflect changes in short-term interest
rates. Compared to fixed-rate securities, whose values decline when interest
rates rise, ARPs can offer greater price stability. At the end of June, the
fund had an approximate 25% stake in ARPs.
UTILITY COMMONS OFFER VALUE;
DEFENSIVE APPROACH TO CONTINUE
With the Dow Jones and S&P(R) Utility Averages down 27.62% and 7.39%,
respectively, for the year ended June 30, 1994, the common stocks of public
utility companies have clearly taken a beating. The fund normally holds few
utility common stocks and, fortunately, held almost none during this spring's
sell-off. However, with prices for the group greatly depressed, we view this
as an excellent buying opportunity and had increased the fund's weighting to
about 5.8% of assets by fiscal year's-end.
Looking ahead, we plan to continue the defensive posture adopted in late
1993. Although the interest rate outlook remains uncertain, we have reduced
the fund's exposure to rising rates and have therefore reduced its overall
risk level. We monitor the spread between short- and long-term rates on a
daily basis and will continue to evaluate the use of the remaining leverage
in that light.
<PAGE>
TOP 10 HOLDINGS (6/30/94)
<TABLE>
<CAPTION>
<S> <C>
Company Type Of Investment
.................................................................................................................................
McDermott, Inc. Sinking Fund Ser. B, $2.60 pfd.
Oil services company Sinking fund preferred stock
.................................................................................................................................
First Chicago Corp. $3.50, ARP
Bank holding company Adjustable-rate preferred stock
.................................................................................................................................
Georgia Power Co. Ser. 93-2, $1.375, ARP
Electric utility Adjustable-rate preferred stock
.................................................................................................................................
Chemical Banking Corp. Ser. L, $6.17, ARP
Bank holding company Adjustable-rate preferred stock
.................................................................................................................................
Detroit Edison Co. $1.9375 dep. shs. pfd.
Electric utility Preferred stock
.................................................................................................................................
Boise Cascade Corp. Ser. F, $2.35, dep. shs. pfd.
Forest Products Preferred stock
.................................................................................................................................
Delmarva Power & Light $1.937, pfd.
Combined utility Preferred stock
.................................................................................................................................
Texas Utilities Electric Co. Ser. B, $0.4513 dep. shs. pfd.
Electric utility Preferred stock
.................................................................................................................................
Bankers' Trust New York Corp. Ser. Q, $1.58, ARP
Wholesale banker Adjustable-rate preferred stock
.................................................................................................................................
Connecticut Light and Power Co. Sinking Fund, Ser. 92, $3.615 pfd.
Electric utility Sinking fund preferred stock
</TABLE>
These holdings represent 24% of the fund's net assets. Portfolio holdings are
subject to change.
Nearly 88% of the fund's investments are in preferred stocks. These are
divided among perpetuals, sinking funds, and ARPs. With this marketplace as
the fund's primary focus, we will continue to take a long-term,
value-oriented approach.
Our goals for the balance of 1994 are simple: to provide our shareholders --
both corporate and individual -- with above- average income and low
share-price volatility relative to other investments.
<PAGE>
Performance summary
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares changed
over time, assuming you held the shares through the entire period and
reinvested all distributions back into the fund. We show total return in two
ways: on a cumulative long-term basis and on average how the fund might have
grown each year over varying periods. For comparative purposes, we show how
the fund performed relative to appropriate indexes and benchmarks.
TOTAL RETURN FOR PERIODS ENDING 6/30/94
<TABLE>
<CAPTION>
S&P 500
(Common Shares) NAV Market price Index CPI
<S> <C> <C> <C> <C>
1 year -0.66% -6.78% 1.43% 2.49%
3 years 46.77 29.91 30.59 8.82
Annual average 13.64 9.11 9.30 2.86
Life of fund 63.49 33.28 48.65 18.40
(since 9/28/89)
Annual average 10.90 6.24 8.70 3.62
</TABLE>
Performance data represent past results. Investment returns and principal
value will fluctuate so an investor's shares, when sold, may be worth more or
less than their original cost. Fund performance data do not take into account
any adjustment for taxes payable on reinvested distributions.
<PAGE>
TERMS AND DEFINITIONS
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, the liquidation preference and cumulative undeclared dividends
paid on the auction preferred shares, divided by the number of oustanding
common shares.
Market price is the current trading price of one share of the fund. Market
prices are set by transactions between buyers and sellers on the New York
Stock Exchange.
COMPARATIVE BENCHMARKS
Standard & Poor's(R) 500 Index is an unmanaged list of common stocks that is
frequently used as a general measure of stock market performance. The index
assumes reinvestment of all distributions and does not take into account
brokerage commissions or other costs. The fund's portfolio contains
securities that do not match those in the index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it does
not represent an investment return.
<PAGE>
Report of Independent Accountants
For the Year Ended June 30, 1994
To the Trustees and Shareholders of
Putnam Dividend Income Fund
We have audited the accompanying statement of assets and liabilities of
Putnam Dividend Income Fund, including the portfolio of investments owned, as
of June 30, 1994, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in
the period then ended, and the "Financial Highlights" for each of the four
years in the period then ended, and for the period September 28, 1989
(commencement of operations) to June 30, 1990. These financial statements and
"Financial Highlights" are the responsibility of the fund's management. Our
responsibility is to express an opinion on these financial statements and
"Financial Highlights" based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
"Financial Highlights" are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of June 30, 1994, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and "Financial Highlights" referred
to above present fairly, in all material respects, the financial position of
Putnam Dividend Income Fund as of June 30, 1994, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the "Financial Highlights" for
each of the four years in the period then ended, and for the period September
28, 1989 (commencement of operations) to June 30, 1990, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
August 15, 1994
<PAGE>
Portfolio of investments owned
June 30, 1994
<TABLE>
<CAPTION>
<C> <S> <C>
Preferred Stocks (87.9%)(a)
Number of Shares Value
Electric Utilities (32.5%)
77,000 Alabama Power Co. Ser. 93-A,
$1.25 Preferred (pfd.) $ 1,867,250
9,516 Arkansas Power & Light Co.
Sinking Fund, $8.52, Preferred
(pfd.) 959,927
9,950 Cleveland Electric
Illuminating Co. Sinking Fund,
Ser. M, $7.00, Adjustable Rate
Preferred (ARP) 955,200
10,000 Commonwealth Edison Co.
Sinking Fund, $9.00, pfd. 1,018,750
50,000 Connecticut Light & Power Co.
Sinking Fund, Ser. 92, $3,615,
pfd. 2,437,500
140,000 Detroit Edison Co. $1.9375,
dep. shs. pfd 3,290,000
8,500 Detroit Edison Co. $7.45, pfd. 748,000
21,000 Duke Power Co. Sinking Fund,
Ser. R, $7.50, pfd. 2,110,500
6,600 Duke Power Co. Ser. A, $5.66,
ARP 651,750
90,000 Georgia Power Co. Ser. 93,
$1.50, ARP 2,171,250
50,000 Georgia Power Co. $1.9875,
pfd. 1,225,000
145,000 Georgia Power Co. Ser. 93-2,
$1.375, ARP 3,552,500
8,916 Gulf States Utilities Co.
$7.56, pfd. 773,462
10,000 Indiana Michigan Power Co.
Sinking Fund, $5.90, pfd. 878,750
9,000 Louisiana Power & Light Co.
Sinking Fund, $7.00, pfd. 910,125
43,000 Mississippi Power Co. $1.6116,
dep. shs. pfd. 870,750
15,200 Niagara Mohawk Power Corp.
Ser. A, $1.625, ARP 353,400
6,600 Northern States Power Co. Ser.
A, $5.56, ARP 619,575
6,600 Northern States Power Co. Ser.
B, $5.72, ARP 638,550
20,000 Ohio Power Co. Sinking Fund,
$6.35, pfd. 1,835,000
12,350 PacifiCorp Sinking Fund,
$7.48, pfd. 1,270,506
13,300 PacifiCorp Sinking Fund,
$7.12, pfd. $ 1,266,825
10,000 Pacific Enterprises, $7.64,
pfd. 905,000
15,000 Pennsylvania Power & Light Co.
Sinking Fund, $6.33, pfd. 1,410,000
40,000 Puget Sound Power & Light Co.
Ser. B, $1.508, ARP 960,000
15,000 Southern California Edison Co.
Sinking Fund, $6.45, pfd. 1,470,000
6,700 Texas Utilities Electric Co.
Sinking Fund, $10.375, pfd. 720,250
21,400 Texas Utilities Electric Co.
Ser. B, $7.00, ARP 2,091,850
66,000 Texas Utilities Electric Co.
Ser. A, $0.468, dep. shs. pfd. 1,443,750
121,000 Texas Utilities Electric Co.
Ser. B, $0.4513, dep. shs.
pfd. 2,510,750
13,604 Virginia Electic & Power Co.
Sinking Fund, $7.30, pfd. 1,331,493
6,180 Virginia Electric & Power Co.
$7.20, pfd. 590,963
15,000 Virginia Electric & Power Co.
Sinking Fund, $6.35, pfd. 1,515,000
10,000 Virginia Electric & Power Co.
Sinking Fund, $5.58, pfd. 975,000
46,328,626
Banks (18.7%)
10,000 Ahmanson (H.F.) & Co. Ser. B,
$2.40, dep. shs. pfd. 261,250
20,000 Bank of Boston Corp. Ser. E,
$2.15, dep. shs. pfd. 492,500
38,200 BankAmerica Corp. Ser. K,
$2.09375, pfd. 950,225
18,600 BankAmerica Corp. Ser. L,
$2.04, dep. shs. pfd. 451,050
100,000 Bankers Trust New York Corp.
Ser. Q, $1.58, ARP 2,487,500
80,000 Chase Manhattan Corp. Ser. N,
$1.5575, ARP 1,970,000
25,100 Chase Manhattan Corp. $2.71,
pfd. 743,588
<PAGE>
Number of Shares Value
19,000 Chase Manhattan Corp. Ser. H,
$2.44, pfd. $ 532,000
74,800 Chase Manhattan Corp. Ser. M,
$2.10, pfd. 1,879,350
34,262 Chemical Banking Corp. Ser. L,
$6.17, ARP 3,331,980
28,000 Chemical Banking Corp. $1.98,
dep. shs. pfd. 682,500
10,000 Citicorp Ser. 8-B, $8.75, pfd. 955,000
13,000 Citicorp Ser. 3, $7.00, ARP 1,235,000
18,500 Citicorp Ser. 9, $2.28, pfd. 471,750
99,484 First Chicago Corp. $3.50, ARP 4,974,200
58,300 First Interstate Bancorp Ser.
F, $2.46875, dep. shs. pfd. 1,537,660
26,100 Great Western Financial Corp.
$2.075, dep. shs. pfd. 642,712
44,000 Republic New York Corp. Ser.
B, $3.25, ARP 2,178,000
40,000 Sumitomo Bank Ltd. Ser. A,
$2.03125, dep. shs. pfd. 890,000
26,666,265
Combined Utilities (14.5%)
9,694 Baltimore Gas & Electric Co.
Sinking Fund, Ser. 87, $6.75,
pfd. 872,460
10,000 Baltimore Gas & Electric Co.
Ser. 93, $6.70, pfd. 846,250
20,000 Cincinnati Gas & Electric Co.
Sinking Fund, $7.875, pfd. 2,115,000
120,000 Delmarva Power & Light $1.937,
pfd. 2,925,000
50,000 Long Island Lighting Co.
Sinking Fund, Ser. NN, $1.95,
pfd. 950,000
27,000 New York State Electric & Gas
Corp. Ser. B, $1.52, ARP 654,750
5,581 Peco Energy Sinking Fund, Ser.
21, $9.875, pfd. 546,240
20,000 Peco Energy Sinking Fund,
$6.12, pfd. 1,890,000
7,000 Public Service Colorado,
$7.15, pfd. 621,250
24,000 Public Service Electric & Gas
Co. Sinking Fund, $7.44, pfd. 2,448,000
Number of Shares Value
20,000 Rochester Gas & Electric Co.
Sinking Fund, $6.60, pfd. $ 1,900,000
40,000 San Diego Gas & Electric Co.
Sinking Fund, $1.7625, pfd. 1,000,000
20,550 West Penn Power Co. Ser. J,
$8.20, pfd. 2,055,000
18,800 Western Resources, Inc.
Sinking Fund, $7.58, pfd. 1,936,400
20,760,350
Insurance (6.7%)
75,000 Aon Corp. $2.00, pfd. 1,762,500
48,000 Progressive Corp. Ser. A,
$2.34375, pfd. 1,230,000
36,000 Provident Life & Accident
Insurance Co. $2.025, dep.
shs. pfd. 873,000
18,000 SunAmerica Inc. Ser. C, $7.10,
ARP 1,694,250
50,000 SunAmerica Inc. Ser. B,
$2.3125, pfd. 1,287,500
26,000 Transamerica Corp. Ser. D,
$2.125, dep. shs. pfd. 656,500
80,000 Travelers Corp. Ser. D,
$2.3125, dep. shs. pfd. 2,080,000
9,583,750
Oil Services (6.0%)
111,000 LASMO PLC ADS Ser. A, $2.50,
pfd. (b) 2,303,250
190,537 McDermott Inc. Sinking Fund,
Ser. B, $2.60, pfd. 5,811,379
10,000 USX Corp. $3.90, ARP 492,500
8,607,129
Finance (2.4%)
40,000 Bear Stearns & Co. Ser. A,
$2.825, ARP 1,900,000
17,800 Bear Stearns & Co. Ser. B,
$1.97, dep. shs. pfd. 409,400
20,000 Household International, Inc.
Ser. 93-A, $1.8375 dep. shs.
pfd. 452,500
25,000 Morgan Stanley Inc. $2.22,
dep. shs. pfd. 634,375
3,396,275
Forest Products (2.1%)
120,000 Boise Cascade Corp. Ser. F,
$2.35, dep. shs. pfd. 2,940,000
<PAGE>
Number of Shares Value
Automobiles (1.2%)
65,500 General Motors Corp. Ser. B,
$2.28125 dep. shs. pfd. $ 1,703,000
Business Services (1.1%)
67,000 IBM Corp. $1.875, dep. shs.
pfd. 1,566,125
Broadcasting (0.8%)
49,000 Newscorp Overseas Corp. Ser.
A, $2.16, pfd. 1,090,250
Health Care (0.7%)
10,000 Rhone Poulenc Rorer Ser. 3,
$5.84, dep. shs. pfd. 937,500
Transportation (0.6%)
40,000 Amerco Ser. A, $2.125, pfd. 915,000
Paper (0.3%)
20,000 James River Corp. Ser. O,
$2.0625, dep. shs. pfd. 460,000
Gas Utilities (0.3%)
15,000 Phillips Gas Co. Ser. A,
$2.33, pfd. 391,875
Total Preferred Stocks (cost
$130,930,242) $125,346,145
Common Stocks (8.2%) (a)
Number of Shares Value
Combined Utilities (2.5%)
45,000 Baltimore Gas & Electric Co. $ 956,250
40,000 Delmarva Power & Light Co. 725,000
70,000 Western Resources, Inc. 1,881,250
3,562,500
Electric Utilities (2.4%)
50,000 FPL Group, Inc. 1,493,750
20,000 Houston Industries Inc. 652,500
42,000 Texas Utilities Co. 1,317,750
3,464,000
Tobacco (1.4%)
40,000 Philip Morris Cos., Inc. 2,060,000
Retail (1.0%)
50,000 K mart Corp. 775,000
40,000 Woolworth Corp. 635,000
1,410,000
Number of Shares Value
Telephone Utilities (0.6%)
22,000 NYNEX Corp. $ 833,250
Gas Utilities (0.3%)
21,000 UGI Corp. (New) 417,375
Total Common Stocks (cost
$14,360,716) $ 11,747,125
Convertible Preferred Stocks (1.5%) (a) (cost $2,080,000)
Number of Shares Value
40,000 Unocal Corp. $3.50, cv.
pfd. (c) $ 2,170,000
Short-Term Investments (2.1%) (a)
(cost $2,950,000)
Principal Amount Value
$2,950,000 Interest in $410,000,000
joint repurchase agreement
dated June 30, 1994 with
Goldman Sachs & Co., Inc.,
due July 1, 1994 with respect
to various U.S. Treasury obliga-
tions--maturity value of
$2,950,348 for an effective
yield of 4.25% $2,950,000
Total Investments
(cost $150,320,958)(d) $142,213,270
</TABLE>
(a) Percentages indicated are based on total net assets of $142,628,559. Net
assets available to common shareholders are $117,326,104, which correspond to
a net asset value per common share of $10.84.
(b) Security whose value is determined or significantly influenced by trading
on exchanges not in the United States or Canada. ADS after the name of a
foreign holding stands for American Depository Shares, representing ownership
of foreign securities on deposit with a domestic custodian bank.
(c) Security exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At June 30, 1994,
this security amounted to $2,170,000 or 1.5% of total net assets.
(d) The aggregate identified cost on a federal income tax basis is
$150,393,894, resulting in gross unrealized appreciation and depreciation of
$1,357,166 and $9,537,790 respectively, or net unrealized depreciation of
$8,180,624.
The accompanying notes are an integral part of these financial
statements.
<PAGE>
Statement of assets and liabilities
June 30, 1994
<TABLE>
<CAPTION>
Assets
<S> <C>
Investments in securities, at value (identified cost $150,320,958) (Note 1) $142,213,270
Cash 368
Dividends receivable 1,453,586
Unamortized organization expenses (Note 1) 2,839
Total assets 143,670,063
Liabilities
Distributions payable to shareholders $ 703,382
Payable for compensation of Manager (Note 3) 314,819
Payable for administrative services (Note 3) 2,349
Payable for compensation of Trustees (Note 3) 348
Payable for investor servicing and custodian fees (Note 3) 12,612
Other accrued expenses 7,994
Total liabilities 1,041,504
Net assets $142,628,559
Represented by
Series A auction preferred shares, without par value, 740 shares authorized
(250 shares issued at $100,000 per share liquidation preference) (Note 2) $ 25,000,000
Common shares, without par value; unlimited shares authorized; 10,821,255
shares outstanding 122,964,125
Distributions in excess of net investment income (703,381)
Accumulated net realized gain on investment transactions 3,475,503
Net unrealized depreciation of investments (8,107,688)
Net assets $142,628,559
Computation of net asset value
Auction preferred shares at liquidation preference $ 25,000,000
Cumulative undeclared dividends on auction preferred shares 302,455
Net assets allocated to auction preferred shares at liquidation preference 25,302,455
Net assets available to common shares: net asset value per common share
$10.84 ($117,326,104 divided by 10,821,255 shares) 117,326,104
Net assets $142,628,559
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of operations
Year ended June 30, 1994
<TABLE>
<CAPTION>
<S> <C>
Investment income:
Dividends (net of foreign tax of $45,177) $ 13,907,394
Interest 106,562
Total investment income 14,013,956
Expenses:
Compensation of Manager (Note 3) $ 1,442,475
Investor servicing and custodian fees (Note 3) 59,672
Compensation of Trustees (Note 3) 13,921
Auditing 47,609
Legal 6,676
Postage 29,662
Administrative services (Note 3) 6,889
Reports to shareholders 49,095
Amortization of organization expenses (Note 1) 16,155
Preferred stock auction fees 159,999
Other expenses 13,436
Total expenses 1,845,589
Net investment income 12,168,367
Net realized gain on investments (Notes 1 and 4) 3,759,973
Net realized loss on options (Notes 1 and 4) (145,253)
Net unrealized depreciation of investments and options during the
year (15,083,349)
Net loss on investments (11,468,629)
Net increase in net assets resulting from operations $ 699,738
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of changes in net assets
<TABLE>
<CAPTION>
Year ended June 30
1994 1993
<S> <C> <C>
Increase (decrease) in net assets
Operations:
Net investment income $ 12,168,367 $ 14,549,146
Net realized gain on investments 3,759,973 8,385,175
Net realized gain (loss) on options (145,253) 206,743
Net unrealized appreciation (depreciation) of
investments and options (15,083,349) 1,329,016
Net increase in net assets resulting from: operations 699,738 24,470,080
Distributions to auction preferred shareholders from:
Net investment income (1,705,478) (2,239,359)
Net increase (decrease) in net assets resulting from
operations applicable to common shareholders
(excluding cumulative undeclared dividends on auction
preferred shares of $302,455 and $5,652,
respectively) (1,005,740) 22,230,721
Distributions to common shareholders from:
Net investment income (11,297,391) (11,603,834)
Net realized gain on investments (4,144,541) --
Increase (decrease) from capital share transactions
(Note 2):
Common shares -- 1,724,322
Auction preferred shares (49,000,000) --
Total increase (decrease) in net assets (65,447,672) 12,351,209
Net assets
Beginning of year 208,076,231 195,725,022
End of year (including Distributions in excess of net
investment income/undistributed net investment income
of $703,381 and $1,077,189, respectively) $142,628,559 $208,076,231
Number of fund shares
Common shares outstanding at beginning of year 10,821,255 10,675,998
Common shares issued in connection with reinvestment of
distributions -- 145,257
Common shares outstanding at end of year 10,821,255 10,821,255
Auction preferred shares outstanding at beginning of
year 740 740
Preferred shares repurchased (490) --
Auction preferred shares outstanding at end of year 250 740
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Financial Highlights*
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
For the period
September 28, 1989
commencement
of operations to
Year ended June 30 June 30
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 12.39 $ 11.38 $ 10.21 $ 10.26 $ 11.51+
Investment operations:
Net investment income 1.13 1.35 1.49 1.65 1.36
Net realized and unrealized gain
(loss) on investments (1.13) .97 1.15 .05 (1.31)
Total from investment operations -- 2.32 2.64 1.70 .05
Less distributions from:
Net Investment Income
to Preferred Shareholders (0.16) (.21) (.27) (.49) (.35)
to common shareholders (1.04) (1.08) (1.19) (1.25) (.92)
Net gains on investments
to common shareholders (0.38) -- -- -- --
Paid in capital (a)
to common shareholders -- -- -- (.04) --
Total distributions (1.58) (1.29) (1.46) (1.78) (1.27)
Change in cumulative undeclared
dividends on auction preferred
shares .03 (.02) (.01) .03 (.03)
Net asset value, end of period $ 10.84 $ 12.39 $ 11.38 $ 10.21 $ 10.26
Market value, end of period (common
shares) $ 9.750 $ 11.875 $ 12.000 $ 10.375 $ 10.875
Total investment return at market
value (common shares) (%)(b) (6.78) 8.27 28.71 8.41 (7.16)(c)
Net assets, end of period (total
fund) (in thousands) $142,629 $208,076 $196,725 $182,003 $180,338
Ratio of expenses to average net
assets (%)(d) 1.42 1.70 1.64 2.02 1.96(c)
Ratio of net investment income to
average net assets (%)(d) 8.06 9.65 11.14 11.67 12.72(c)
Portfolio turnover (%) 73.63 166.44 160.44 197.67 201.55(e)
</TABLE>
* Financial Highlights for periods ended through June 30, 1992 have been
restated to conform with requirements issued by the SEC in April, 1993.
+ Represents initial net asset value of $11.63 less offering expenses of
approximately $0.12.
(a) See Note 1 to Financial statements.
(b) Total Investment Return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(c) Annualized.
(d) Ratios reflect net assets available to common shares only; net investment
income ratio also reflects reduction for dividend payments to preferred
shareholders.
(e) Not annualized.
<PAGE>
Notes to financial statements
June 30, 1994
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as amended,
as a diversified, closed-end management investment company. The fund's
objective is to seek high current income eligible for dividends received
deduction allowed to corporations under Section 243 (C1) of the Internal
Revenue Code, consistent with preservation of capital by investing in a
portfolio of preferred and common equity securities. The fund will invest at
least 65% of its total assets in dividend-paying securities. Preferred stocks
will be rated "investment grade" at the time of investment or, if not rated,
will be of comparable quality as determined by Putnam Management. The fund
also uses leverage by issuing preferred shares in an effort to increase the
income to the common shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of some
securities traded over-the-counter-- the last reported bid price, except that
certain U.S. government obligations are stated at the mean between the bid
and asked prices. Securities whose market quotations are not readily
available are stated at fair value on the basis of valuations furnished by
pricing services approved by the Trustees, which determine valuations for
normal, institutional-size trading units of such securities using methods
based on market transactions for comparable securities and various
relationships between securities that are generally recognized by
institutional traders. Short-term investments having remaining maturities of
60 days or less are stated at amortized cost, which approximates market
value, and other investments are stated at fair value following procedures
approved by the Trustees.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account, along with the cash of other
registered investment companies managed by Putnam Investment Management, Inc.
("Putnam Management"), the fund's Manager, a wholly-owned subsidiary of
Putnam Investments, Inc., and certain other accounts. These balances may be
invested in one or more repurchase agreements and/or short-term money market
instruments.
C) Repurchase agreements The fund, or any joint trading account, through the
fund's custodian, receives delivery of the underlying securities, the market
value of which at the time of purchase is required to be in an amount at
least equal to the resale price, including accrued interest. The fund's
Manager is responsible for determining that the value of these underlying
securities is at all times at least equal to the resale price, including
accrued interest.
<PAGE>
D) Determination of net asset value Net asset value of the common shares is
determined by dividing the value of all assets of the fund (including accrued
interest and dividends), less all liabilities (including accrued expenses),
undeclared dividends on remarketed preferred shares and the liquidation value
of any outstanding remarketed preferred shares, by the total number of common
shares outstanding.
E) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis and dividend
income is recorded on the ex-dividend date.
F) Option accounting principles When the fund writes a call or put option, an
amount equal to the premium received by the fund is included in the fund's
"Statement of assets and liabilities" as an asset and an equivalent
liability. The amount of the liability is subsequently "marked- to-market" to
reflect the current market value of the option written. The current market
value of an option is the last sale price or, in the absence or a sale, the
last offering price. If an option expires on its stipulated expiration date,
or if the fund enters into a closing purchase transaction, the fund realizes
a gain (or loss if the cost of a closing purchase transaction exceeds the
premium received when the option was written) without regard to any
unrealized gain or loss on the underlying security, and the liability related
to such option is extinguished. If a written call option is exercised, the
fund realizes a gain or loss from the sale of the underlying security and the
proceeds of the sale are increased by the premium originally received. If a
written put option is exercised, the amount of the premium originally
received reduces the cost of the security which the fund purchases upon
exercise of the option.
The fund writes covered call options; that is, options for which it holds the
underlying security or its equivalent. Accordingly, the risk in writing a
call option is that the fund relinquishes the opportunity to profit if the
market price of the underlying security increases and the option is
exercised. In writing a put option, the fund assumes the risk of incurring a
loss if the market price of the underlying security decreases and the option
is exercised.
G) Federal taxes It is the policy of the fund to distribute all of its income
within the prescribed time and otherwise comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986. Therefore, no provision has been made for federal taxes on income,
capital gains or unrealized appreciation of securities held and excise tax on
income and capital gains.
H) Distributions to shareholders Distributions to common and preferred
shareholders are recorded by the fund on the ex-dividend date. Dividends on
each share of auction preferred shares will accumulate from its Date of
Original Issue and will be payable, when,
<PAGE>
and as if declared by the Board of Trustees, on the applicable Dividend
Payment Dates. The dividend period for auction preferred Series A is a 49-day
period. The applicable dividend rate for the auction preferred shares Series
A at June 30, 1994 was: 2.75%. At certain times, the fund may pay
distributions at a level rate even though, as a result of market conditions
or investment decisions, the fund may not achieve projected investment
results for a given period.
The amount and character of income and gains to be distributed are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences include treatment of wash
sales. Reclassifications are made to the Fund's capital accounts to reflect
income and gains available for distribution (or available capital loss
carryovers) under income tax regulations. For the year ended June 30, 1994,
the Fund reclassified $572,022 to decrease undistributed net investment
income and $572,022 to increase accumulated net realized gain on investments.
I) Unamortized organization expenses Expenses incurred by the fund in
connection with its organization aggregated $79,675. These expenses are being
amortized on a straight-line basis over a period not to exceed 60 months from
the date the fund commenced operations.
Note 2
Auction Preferred Shares
On September 28, 1989, the fund issued 740 Auction Preferred Shares, Series
A. Proceeds to the fund before underwriting expenses of $1,295,000 and
$308,080 of offering expenses, amounted to $74,000,000. During the fiscal
year ended June 30, 1994, a total of 490 shares were repurchased at a value
of $49,000,000. Undeclared dividends on the Preferred Shares amounted to
$302,455 at June 30, 1994. The Shares are redeemable at the option of the
fund on any dividend payment date at a redemption price of $100,000 per
share, plus an amount equal to any dividends accumulated on a daily basis but
unpaid through the redemption date (whether or not such dividends have been
declared).
Under the Investment Company Act of 1940, the fund is required to maintain
asset coverage of at least 200% with respect to the auction preferred shares
as of the last business day of each month in which any such shares are
outstanding. Additionally, the fund is required to meet more stringent asset
coverage requirements under the terms of the auction preferred shares and the
shares' rating agencies. Should these requirements not be met, or should
dividends accrued on the auction preferred shares not be paid, the fund may
be restricted in its ability to declare dividends to common shareholders or
may be required to redeem certain of the auction preferred shares. At June
30, 1994, no such restrictions have been placed on the fund.
Note 3
Management fee, administrative
services, and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund,
including proceeds from the remarketed
<PAGE>
preferred offering. Such fee is based on the following annual rates: 0.75% of
the first $500 million of average net assets, 0.65% of the next $500 million,
0.60% of the next $500 million and 0.55% of any amount over $1.5 billion.
If dividends payable on auction preferred shares during any dividend payment
period plus any expenses attributable to auction preferred shares for that
period exceed the fund's net income attributable to the proceeds of the
auction preferred shares during that period, then the fee payable to Putnam
for that period will be reduced by the amount of the excess (but not more
than 0.85% of the liquidation preference of the auction preferred shares
outstanding during the period).
The fund also reimburses the Manager for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees. For the year ended
June 30, 1994, the fund paid $6,889 for these services.
Trustees of the fund receive an annual Trustee's fee of $860 and an
additional fee for each Trustees' meeting attended. Trustees who are not
interested persons of the Manager and who serve on committees of the Trustees
receive additional fees for attendance at certain committee meetings.
Custodial functions for the fund are provided by Putnam Fiduciary Trust
Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor servicing
agent functions are provided by Putnam Investor Services, a division of PFTC.
Fees paid for these investor servicing and custodial functions for the year
ended June 30, 1994 amounted to $59,672.
Investor servicing and custodian fees reported in the Statement of operations
for the year ended June 30, 1994 have been reduced by credits allowed by
PFTC.
Note 4
Purchases and sales of securities
During the year ended June 30, 1994, purchases and sales of investment
securities other than short-term investments aggregated $133,955,362 and
$181,654,100, respectively. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the identified cost
basis.
Written call option transactions during the year are summarized as follows:
<TABLE>
<CAPTION>
Shares Subject Premiums
to Call Received
<S> <C> <C>
Written call options outstanding at beginning of year 25,000 $ 105,496
Options closed (25,000) (105,496)
Written call options outstanding at end of year -- $ --
</TABLE>
<PAGE>
Note 5
Share Repurchase Program
The Trustees authorized the Fund to repurchase 740 of its Auction Preferred
shares Series A.
During the fiscal year ended June 30, 1994, a total of 490 shares were
repurchased at a value of $49,000,000.
Note 6
Reclassification of Capital Accounts
Effective July 1, 1993, Putnam Dividend Income Fund has adopted the
provisions of Statement of Position (SOP) 93-2 "Determination, Disclosure and
Financial Statement Presentation of Income, Capital Gain and Return of
Capital Distributions, by Investment Companies." The purpose of this SOP is
to report the accumulated net investment income (loss) and accumulated net
realized gain (loss) accounts in such a manner as to approximate amounts
available for future distributions (or to offset future realized capital
gains) and to achieve uniformity in the presentation of distributions by
investment companies.
As a result of the SOP, the fund has reclassified $374,046 to decrease
undistributed net investment income and increase common shares, without par
value, by the same amount.
These adjustments represent the cumulative amounts necessary to report these
balances through June 30, 1993.
<PAGE>
Selected quarterly data
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
June 30 March 31 December 31 September 30
1994 1994 1993 1993
<S> <C> <C> <C> <C>
Total investment income
Total $ 2,962,961 $ 3,397,147 $ 3,742,849 $ 3,910,999
Per Share* $ .28 $ .32 $ .34 $ .36
Net investment income
available to common
shareholders
Total $ 2,235,583 $ 2,445,713 $ 2,650,334 $ 3,131,259
Per Share* $ .21 $ .23 $ .24 $ .29
Net realized and unrealized
gain (loss) on investments
Total $ (4,497,249) $ (7,942,482) $ (3,456,693) $ 4,427,795
Per Share* $ (.48) $ (.75) $ (.31) $ .41
Net increase (decrease) in
assets resulting from
operations
Total $ (2,261,666) $ (5,496,769) $ (806,359) $ 7,559,054
Per Share* $ (.27) $ (.52) $ (.07) $ .70
Net assets available to
common shareholders at the
end of the period
Total $117,326,104 $121,879,941 $129,714,179 $138,962,635
Per Share* $ 10.84 $ 11.26 $ 11.99 $ 12.84
*Per common share
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three months ended
June 30 March 31 December 31 September 30
1993 1993 1992 1992
<S> <C> <C> <C> <C>
Total investment income
Total $ 4,736,892 $ 4,207,385 $ 3,946,509 $ 3,821,668
Per Share* $ .43 $ .25 $ .42 $ .45
Net investment income
available to common
shareholders
Total $ 3,726,527 $ 3,025,708 $ 2,866,538 $ 2,691,014
Per Share* $ .34 $ .18 $ .30 $ .32
Net realized and unrealized
gain (loss) on investments
Total $ 505,766 $ 7,502,324 $ (1,978,886) $ 3,891,731
Per Share* $ .10 $ .77 $ (.20) $ .30
Net increase (decrease) in
assets resulting from
operations
Total $ 4,232,292 $ 10,528,032 $ 887,652 $ 6,582,745
Per Share* $ .44 $ .95 $ .10 $ .62
Net assets available to
common shareholders at the
end of the period
Total $134,070,579 $132,162,069 $123,925,485 $125,606,247
Per Share* $ 12.39 $ 12.24 $ 11.52 $ 11.72
</TABLE>
<PAGE>
Dividend Policy
It is the fund's dividend policy to pay monthly distributions from net
investment income and any net realized short-term gains (including gains from
options and futures transactions). Long-term capital gains are distributed at
least annually. In an effort to maintain a more stable level of
distributions, the fund's monthly distribution rate will be based on Putnam
Management's projections of the net investment income and net realized
short-term capital gains that the fund is likely to earn over the long term.
At the time of each distribution, shareholders are furnished Putnam
Management's current estimate of the sources of such distribution. These
estimates are subject to adjustment depending on investment results for the
fund's entire fiscal year. Final information regarding such matters is
furnished to shareholders in the fund's annual reports and in tax information
provided following the end of each calendar year.
<PAGE>
Federal tax information
The distributions from investment income totaling $1.119 were designated as
"dividend income" for federal income tax purposes. The fund has designated
approximately 100% of the distributions as qualifying for the
dividends-received deduction for corporations. The fund also distributed
$0.058 per share in short-term capital gains and $0.325 in long-term capital
gains.
The Form 1099 you will receive in January 1995 will show the tax status of
all distributions paid to your account in calendar 1994.
<PAGE>
Fund information
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Peter Carman
Vice President
Thomas Reilly
Vice President
Jeanne Mockard
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
John D. Hughes
Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Dividend
Income Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales charges,
investment objectives, and operating policies of the fund, and the most
recent copy of Putnam's Quarterly Performance Summary.
<PAGE>
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
Bulk Rate
U.S. Postage
Paid
Boston, MA
Permit No. 53749
056-13357
<PAGE>
APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED
AND EDGAR-FILED TEXTS:
(1) Bold and italic typefaces are displayed in normal type.
(2) Headers (e.g., the name of the fund) are omitted.
(3) Certain tabular and columnar headings and symbols are displayed
differently in this filing.
(4) Bullet points and similar graphic signals are omitted.
(5) Page numbering is omitted.
(6) Trademark symbol replaced with (TM)
