Putnam
Dividend
Income Fund
SEMIANNUAL REPORT
December 31, 1994
(Graphic- Balance Scales)
B O S T O N * L O N D O N * T O K Y O
<PAGE>
Performance highlights
> "Putnam Dividend Income Fund's prudent response to [1994's]
volatile interest-rate climate isn't too surprising: the fund's unwillingness
to take big gambles is reflected in its below-average risk score [over the
past three years]."
- --Morningstar Closed-End Funds, November 4, 1994*
> Performance should always be considered in light of a fund's
investment strategy. Putnam Dividend Income Fund is designed for investors
seeking a high level of current income, consistent with preservation of
capital.
SEMIANNUAL RESULTS AT A GLANCE
<TABLE>
<CAPTION>
Total return: NAV Market price
<S> <C> <C>
.............................................................................................
(change in value during period plus
reinvested distributions)
6 months ended 12/31/94 -1.85% -5.21%
Share value: NAV Market price
.............................................................................................
6/30/94 $10.84 $9.750
12/31/94 9.93 8.625
</TABLE>
<TABLE>
<CAPTION>
Capital gains(1)
Long-
Distributions: No. Income term Total
.............................................................................................
<S> <C> <C> <C> <C>
6 $0.390 $0.260 $0.650
</TABLE>
<TABLE>
<CAPTION>
Current return: NAV Market price
.............................................................................................
<S> <C> <C>
end of period
Current dividend rate(2) 7.85% 9.04%
Taxable equivalent
(for corporate investors) (3) 10.81% 12.45
</TABLE>
Performance data represent past results. For performance over longer periods,
see page 8.
(1) Capital gains are taxable. Investment income may be subject to state and
local taxes for corporate investors; federal, state and local taxes for
noncorporate investors.
(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.
* Morningstar is an independent industry research firm. It rates a fund in
relation to other funds with similar investment objectives, based on the
fund's 3-, 5-, and 10-year average annual returns, adjusted for risk factors
and sales charges. Ratings are updated monthly.
<PAGE>
From the Chairman
Dear Shareholder:
(Photo of George Putnam)
(c) Karsh, Ottawa
There can be no denying that 1994 was a tumultuous year for preferred stock
investors. Rising interest rates -- the bane of all fixed-income investors --
weighed down returns, causing investors to shift their collective focus
toward defensive strategies designed to preserve capital.
The new year, now well under way, already shows tentative signs of a more
hopeful attitude among U.S. investors. If they can be convinced that the
economy will slow to a level that will restrain inflation, the prices of
fixed-income securities may respond positively.
Renewed strength in the preferred stock market would be welcome news for
Putnam Dividend Income Fund's shareholders. Fund Manager Jeanne Mockard is
watching the signs carefully and making the adjustments she believes will
most effectively take advantage of current and emerging trends.
In the report that follows, Jeanne discusses the semiannual period just ended
and the outlook for your fund in the coming months.
Respectfully yours,
[George Putnam signature]
George Putnam
Chairman of the Trustees
February 15, 1995
<PAGE>
Report from the fund manager
Jeanne L. Mockard
For the first six months of fiscal 1995, Putnam Dividend Income Fund
continued to operate in an environment of rising interest rates and generally
challenging conditions for fixed-income investors. In August and November,
the Federal Reserve Board raised short-term interest rates a total of 1.25
percentage points as it continued its battle against perceived inflationary
pressures. Perpetual preferred stocks, the most interest-rate-sensitive
sector of the preferred market, performed better than they did in the first
half of calendar 1994. Nonetheless, the Merrill Lynch Perpetual Preferred
Stock Index, a commonly used indicator of preferred-stock performance,
measured -1.21% over the period. Your fund, which normally invests the
majority of its assets in preferred stocks, reflected the broader market's
trend by posting a total return of -1.85% at net asset value for the fiscal
year's first half. Over the longer term, the fund's performance at net asset
value has surpassed both the Merrill Lynch index and the Standard & Poor's(R)
500 Index, as the table on page 8 shows.
> RISING SHORT-TERM RATES PROMPT MANAGEMENT TO ELIMINATE
LEVERAGE
Throughout most of its history, the fund has maintained a leveraged component
in the portfolio, borrowing money at low short- term rates and reinvesting it
at higher long-term rates and profiting from the difference. This strategy
worked well from 1991 through 1993, when the spread between short- and
long-term rates was wide. However, given the current market environment and
the changing complexion of interest rates, we thought it prudent to further
our efforts to reduce the fund's interest-rate sensitivity. As a result, on
November 3, the Trustees approved the elimination of the fund's remaining $25
million of leverage. Redemption of the remaining 250 auction preferred shares
- -- short-term securities sold by the fund -- was effective on December 19,
1994. (The fund retains the ability to make use of leveraging strategies in
the future, should interest-rate conditions become more favorable.)
<PAGE>
The primary motivator behind the elimination of the fund's existing leverage
was the continued flattening of the taxable yield curve. Short-term interest
rates continued to rise at a much faster pace than long-term rates over the
six months ended December 31, 1994. During this period, the yield on the
two-year Treasury note rose by 1.52 percentage points, while the yield on the
30-year Treasury bond increased only 0.27 of a percentage point.
Maintaining leverage in such an environment increases risk in two ways.
First, the fund's financing costs in the auction-preferred market increase as
short-term interest rates increase. Second, investing with borrowed funds
amplifies both percentage gains and losses. When interest rates are falling,
resulting in increasing prices for existing fixed-income securities, the
fund's percentage gains on its investments are magnified. Conversely, when
rates are rising, percentage losses can quickly mount. Therefore, we
concluded that the most sensible alternative was to deleverage the fund
completely, thus eliminating one element of risk to shareholders' capital.
While such risk-management tactics are clearly advisable in light of the
current interest-rate structure, one unfortunate consequence of reducing
leverage is that the total income generated by the portfolio is also reduced.
Accordingly, the Trustees announced in November that the fund's per-share
dividend would be reduced by one-half cent from $0.065 to $0.06, effective
March 1995. We believe this modest decrease is a reasonable tradeoff for
controlling the significant risk to principal that the leverage represented.
[TABULAR REPRESENTATION OF BAR CHART]
TOP INDUSTRY SECTORS 12/31/94*
Electric utilities 39.4%
Banks 21.6%
Combined utilities 11.6%
Oil services 7.6%
Insurance 6.9%
*Industry breakdown reflects both common and preferred stock holdings.
Based on net assets on 12/31/94. Holdings will vary over time.
<PAGE>
> VALUE IN LONG-TERM FIXED-INCOME SECURITIES AFTER SELLOFF
In the weeks leading up to the leverage redemption, we increased the fund's
cash level by liquidating various common-stock positions. This process of
generating cash was necessitated by the fund's need to buy back the
short-term securities it had issued. Moreover, it reflected a strategic shift
in the portfolio, which we are continuing to implement.
Given the well-publicized pummeling that long-term fixed-income instruments
have suffered at the hands of higher interest rates, we now believe
longer-term bonds offer considerable value. What's more, when examined using
various measures of relative valuation, the fixed-income markets, especially
the longer-maturity segment, appear to offer greater value than many common
stocks. Therefore, we have begun to increase the fund's allocation to
perpetual and sinking-fund preferreds, which tend to respond to interest-rate
movements in a manner similar to that of long-term bonds.
Of course, such a reallocation is predicated on our view that long-term
rates may be stabilizing. While there can be no assurance of such an outcome,
an inflation premium of approximately five percentage points -- the current
spread between long-term Treasury rates and the inflation rate -- is
historically large and attractive. Should long-term rates remain near or move
below their current levels, the prospects for capital appreciation and/or
preservation on long-term securities is greatly improved.
> A THREE-POINT PLAN FOR IMPROVED TOTAL-RETURN POTENTIAL
Going forward, our plan is to deploy the fund's assets in several ways.
First, as mentioned above, we expect to increase the fund's investments in
the more interest-rate-sensitive sectors of the preferred market, given the
multitude of attractive opportunities that are now available in the wake of
calendar 1994's decline. This action also reflects our view that the
risk/reward balance for long- term fixed-income securities -- and for the
fixed-income market in general -- is favorable once again.
We also plan to buy securities on weakness across a range of maturities. This
value technique will likely involve purchasing
<PAGE>
TOP 10 HOLDINGS (12/31/94)
Texas Utilities, Series B, $7.00 ARP
Electric utility
..................................................................
McDermott, Inc., Series B, $2.60 sinking fund pfd.
Oil services company
..................................................................
Virginia Electric & Power, $7.20 pfd.
Electric utility
..................................................................
Georgia Power, $1.9375 pfd.
Electric utility
..................................................................
First Chicago Corp., $3.50 ARP
Bank holding company
..................................................................
Detroit Edison, $1.9375 dep. shares pfd.
Electric utility
..................................................................
Chemical Banking Corp., $1.98 dep. shares pfd.
Bank holding company
..................................................................
SunAmerica, Inc., Series C, $7.75 ARP
Insurance company
..................................................................
Boise Cascade Corp., Series F, $2.35 dep. shares pfd.
Forest products company
..................................................................
General Motors Corp., Series B, $2.28125 dep. shs. pfd.
Automobile manufacturer
These holdings represent 36.4% of the fund's net assets. Portfolio holdings
will vary over time.
adjustable-rate preferreds (ARPs), whose prices have declined moderately as
short-term interest rates have risen. (The price movement of ARPs tends to
mimic short-term-bond prices.) We may also purchase select common stocks in
interest-rate-sensitive sectors that have yet to recover fully from the
profit-draining effects of higher rates, namely, financials and utilities.
The final component of our plan involves a constant, careful monitoring of
the yield curve. The ebb and flow of yields across various maturities is
continuous, and the curve changes shape to reflect, among other things,
investors' expectations of economic growth. Its current, relatively flat
shape, reflects expectations for slower growth in 1995. If growth does slow,
our gradual shift toward intermediate- and longer-term securities may prove
quite beneficial to the fund in the fiscal year's second half.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of December 31, 1994, there is no guarantee the fund will
continue to hold these securities in the future.
<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 12/31/94
<TABLE>
<CAPTION>
Merrill Lynch
Perpetual Standard &
Preferred Poor's
NAV Market price Index 500 Index CPI
<S> <C> <C> <C> <C> <C>
6 months -1.85% -5.21% -1.21% 4.87% 1.15%
1 year -7.65 -9.48 -5.69 1.36 2.68
3 years 22.60 11.13 16.71 20.01 8.56
Annual average 7.03 3.58 5.29 6.27 2.77
Life of fund 60.47 26.33 -- 56.13 19.76
(since 9/28/89)
Annual average 9.43 4.55 -- 8.86 3.49
</TABLE>
Performance data represent past results. Investment returns and market price
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.
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 outstanding
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.
Merrill Lynch Perpetual Preferred Index is an unmanaged list of perpetual
preferred stocks that is commonly used as a general measure of performance
for the preferred-stock market. The index assumes reinvestment of all
distributions and does not take into account brokerage commissions or other
costs. The securities that make up the fund's portfolio do not match those in
the index. Since management tends to invest the majority of the fund's assets
in preferred stocks, the Merrill Lynch Perpetual Preferred Index is a more
appropriate benchmark for comparative performance than the S&P 500 Index.
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.
Consumer Price Index (CPI) is a commonly used measure of inflation; it does
not represent an investment return.
<PAGE>
Portfolio of investments owned
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Preferred Stocks (98.7%) (a)
Number of Shares Value
Electric Utilities (38.7%)
<S> <C> <C>
8,885 Arkansas Power & Light Co. Sinking Fund, $8.52, Preferred (pfd.) $ 895,164
4,950 Cleveland Electric Illuminating Co. Sinking Fund, Ser. M, $7.08,
Adjustable Rate Preferred (ARP) 470,250
10,000 Commonwealth Edison Co. Sinking Fund, $9.00, pfd. 1,000,000
50,000 Connecticut Light & Power Co. Sinking Fund, Ser. 92, $3.615,
pfd. 2,250,000
8,500 Detroit Edison Co. $7.45, pfd. 728,875
140,000 Detroit Edison Co. $1.9375, dep. shs. pfd. 3,027,500
21,000 Duke Power Co. Sinking Fund, Ser. R, $7.50, pfd. 2,031,750
6,600 Duke Power Co. Ser. A, $6.1985 ARP 610,500
50,000 Georgia Power Co. $1.9875, pfd. 1,131,250
145,000 Georgia Power Co.
Ser. 93-2, $1.5325, ARP 2,972,500
8,916 Gulf States Utilities Co. $7.56, pfd. 689,876
10,000 Indiana Michigan Power Co. Sinking Fund, $5.90, pfd. 857,500
50,000 Long Island Lighting Co. Sinking Fund, Ser. NN, $1.95, pfd. 925,000
9,000 Louisiana Power & Light Co. Sinking Fund, $7.00, pfd. 882,000
43,000 Mississippi Power Co. $1.58, dep. shs. pfd. 795,500
20,000 Niagara Mohawk $2.375, pfd. 500,000
15,200 Niagara Mohawk Power Corp. Ser. A, $1.65, ARP 296,400
14,100 Northern States Power Co. Ser. B, $5.9709, ARP 1,240,800
6,600 Northern States Power Co. Ser. A, $5.8178, ARP 575,025
20,000 Ohio Power Co. Sinking Fund, $6.35, pfd. 1,790,000
12,350 PacifiCorp Sinking Fund, $7.48, pfd. 1,242,719
13,300 PacifiCorp Sinking Fund, $7.12, pfd. $ 1,190,350
10,000 Pacific Enterprises, $7.64, pfd. 836,250
15,000 Pennsylvania Power & Light Co. Sinking Fund, $6.33, pfd. 1,344,375
40,000 Puget Sound Power & Light Co. Ser. B, $1.655, ARP 860,000
5,300 Southern California Edison Co. $7.58, pfd. 445,200
10,000 Southern California Edison Co. Sinking Fund, $6.45, pfd. 927,500
6,700 Texas Utilities Electric Co. Sinking Fund $10.375, pfd. 690,100
21,400 Texas Utilities Electric Co. Ser. B, $7.00, ARP 2,011,600
66,000 Texas Utilities Electric Co. Ser. A, $1.875, dep. shs. pfd. 1,369,500
121,000 Texas Utilities Electric Co. Ser. B, $1.805, dep. shs. pfd. 2,420,000
13,604 Virginia Electric & Power Co. Sinking Fund, $7.30, pfd. 1,237,964
6,180 Virginia Electric & Power Co. $7.20, pfd. 520,665
25,000 Virginia Electric & Power Co. Sinking Fund, $6.35, pfd. 2,412,500
5,000 Virginia Electric & Power Co. $6.98, pfd. 411,875
41,590,488
Banks (21.6%)
10,000 Ahmanson (H.F.) & Co.
Ser. B, $2.40, dep. shs. pfd. 251,250
14,200 Ahmanson (H.F.) & Co.
Ser. C, $2.10, dep. shs. pfd. 333,700
20,000 Bank of Boston Corp.
Ser. E, $2.15, dep. shs. pfd. 475,000
60,000 BankAmerica Corp. Ser. H, $2.25, pfd. 1,500,000
38,200 BankAmerica Corp. Ser. K, $2.09375, pfd. 902,475
<PAGE>
18,600 BankAmerica Corp. Ser. L, $2.04, dep. shs. pfd. $ 437,100
70,000 Bankers Trust New York Corp. Ser. Q, $1.72443 ARP 1,382,500
25,100 Chase Manhattan Corp. Ser. I, $2.71, pfd. 696,525
19,000 Chase Manhattan Corp. Ser. H, $2.44, pfd. 489,250
74,800 Chase Manhattan Corp. Ser. M, $2.10, pfd. 1,785,850
80,000 Chase Manhattan Corp. Ser. N, $1.67875, ARP 1,720,000
34,262 Chemical Banking Corp. Ser. L, $6.663, ARP 2,929,400
28,000 Chemical Banking Corp. $1.98, dep. shs. pfd. 630,000
10,000 Citicorp Ser. 8-B, $8.25, pfd. 905,000
13,000 Citicorp Ser. 3, $7.00, ARP 1,085,500
18,500 Citicorp Ser. 9, $2.28, pfd. 462,500
84,984 First Chicago Corp. $3.50, ARP 3,941,132
13,000 First Chicago Ser. E, $2.1125, dep. shs. pfd. 308,750
58,300 First Interstate Bancorp
Ser. F, $2.46875, dep. shs. pfd. 1,486,650
26,100 Great Western Financial Corp. $2.075, dep. shs. pfd. 600,300
40,000 Sumitomo Bank Ltd. Ser. A, $2.03125, dep. shs. pfd. 860,000
23,182,882
Combined Utilities (11.6%)
9,694 Baltimore Gas & Electric Co. Sinking Fund, Ser. 87, $6.75, pfd. 814,296
10,000 Baltimore Gas & Electric Co. Ser. 93, $6.70, pfd. 782,500
20,000 Cincinnati Gas & Electric Co. $9.15 Pfd. 2,120,000
27,000 New York State Electric & Gas Corp. Ser. B, $1.59, ARP 607,500
20,000 Peco Energy Sinking Fund, $6.12, pfd. 1,850,000
7,000 Public Service Colorado, $7.15, pfd. 586,250
5,000 Public Service Electric & Gas Co. $7.70, pfd. 461,250
19,000 Public Service Electric & Gas Co. Sinking Fund, $7.44, pfd. $ 1,881,000
6,750 Public Service Electric & Gas Co. $6.92, pfd. 544,219
20,000 Rochester Gas & Electric Co. Ser. V, Sinking Fund, $6.60, pfd. 1,832,500
40,000 San Diego Gas & Electric Co. Sinking Fund, $1.7625, pfd. 940,000
12,419,515
Oil Services (7.6%)
111,000 LASMO PLC ADS Ser. A, $2.50, pfd. 2,261,625
190,537 McDermott Inc. Sinking Fund, Ser. B, $2.60, pfd. 5,430,305
10,000 USX Corp. $4.175 ARP 495,000
8,186,930
Insurance (6.9%)
48,000 Progressive Corp. Ser. A, $2.34375, pfd. 1,200,000
36,000 Provident Life & Accident Insurance Co. $2.025, dep. shs. pfd. 796,500
18,000 SunAmerica Inc. Ser. C, $7.75, ARP 1,638,000
50,000 SunAmerica Inc. Ser. B, $2.3125, pfd. 1,250,000
80,000 Travelers Corp. Ser. D, $2.3125, dep. shs. pfd. 2,000,000
25,000 Travelers Corp. Ser. A, $2.03125, dep. shs. pfd. 565,625
7,450,125
Forest Products (2.7%)
120,000 Boise Cascade Corp. Ser. F, $2.35, dep. shs. pfd. 2,880,000
Automobiles (2.6%)
65,500 General Motors Corp.
Ser. B, $2.28125 dep. shs. pfd. 1,637,500
45,000 General Motors Corp.
Ser. G, $2.28, pfd. 1,119,375
2,756,875
Finance (2.4%)
40,000 Bear Stearns & Co. Ser. A, $3.225, ARP 1,720,000
9,000 Bear Stearns & Co. Ser. B, $1.97, dep. shs. pfd. 196,875
<PAGE>
4,400 Merrill Lynch & Co., Inc. Ser. A, $2.25, dep. shs. pfd. $ 110,550
25,000 Morgan Stanley Inc. $2.22, dep. shs. pfd. 612,500
2,639,925
Business Services (1.4%)
67,000 IBM Corp. Ser. A. $1.875, dep. shs. pfd. 1,490,750
Broadcasting (1.0%)
49,000 Newscorp Overseas Corp. Ser. A, $2.16, pfd. 1,029,000
Health Care (0.9%)
10,000 Rhone Poulenc Rorer
Ser. 3, $0.00584, dep.
shs. pfd. 932,500
Transportation (0.6%)
40,000 Amerco Ser. A, $2.125, pfd. 680,000
Paper (0.4%)
20,000 James River Corp. Ser. O, $2.0625, dep. shs. pfd. 425,000
Gas Utilities (0.3%)
15,000 Phillips Gas Co. Ser. A, $2.33, pfd. 378,750
Total Preferred Stocks (cost $118,132,035) $106,042,740
Convertible Preferred Stocks (1.8%) (a) (cost $2,080,000)
Number of Shares Value
40,000 Unocal Corp. $3.50, cv.
pfd. 144A $ 1,960,000
Common Stocks (1.3%) (a)
Number of Shares Value
Electric Utilities (0.7%)
20,000 Houston Industries Inc. 712,500
Retail (0.6%)
50,000 K mart Corp. 650,000
Total Common Stocks (cost $1,948,631) $ 1,362,500
Short-Term Investments (1.4%) (a)
(cost $1,524,449)
Principal Amount Value
$1,524,000
Interest in $267,187,000 joint repurchase agreement dated December 30, 1994
with JP Morgan Securities, due January 3, 1995 with respect to various U.S.
Treasury Obligations--maturity value of $1,524,897 for an effective yield
of 5.30%. $1,524,449
Total Investments
(cost $123,685,115)(b) $110,889,689
</TABLE>
(a) Percentages indicated are based on total net assets of $107,443,034,
which correspond to a net asset value per common share of $9.93.
(b) The aggregate identified cost on a tax basis is $123,758,050, resulting
in gross unrealized appreciation and depreciation of $190,395 and $13,058,756
respectively, or net unrealized depreciation of $12,868,361.
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.
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of assets and liabilities
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Assets
<S> <C>
Investments in securities, at value (identified cost $123,685,115) (Note 1) $110,889,689
Cash 666
Dividends receivable 1,498,540
Total assets 112,388,895
Liabilities
Distributions payable to shareholders $ 3,758,529
Payable for securities purchased 895,300
Payable for compensation of Manager (Note 3) 249,601
Payable for administrative services (Note 3) 4,580
Payable for compensation of Trustees (Note 3) 241
Payable for investor servicing, custodian fees and other expenses (Note 3) 37,610
Total liabilities 4,945,861
Net assets $107,443,034
Represented by
Common shares, without par value; unlimited shares authorized; 10,821,255
shares outstanding $122,964,125
Distributions in excess of net investment income (795,074)
Accumulated net realized loss on investment transactions (1,930,591)
Net unrealized depreciation of investments (12,795,426)
Total--Representing net asset applicable to capital shares outstanding $107,443,034
Computation of net asset value
Net assets value per share ($107,443,034 divided by 10,821,255 shares) $9.93
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of operations
Six months ended December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Investment income:
Dividends (net of foreign tax of $17,849) $ 5,034,268
Interest 92,916
Total investment income 5,127,184
Expenses:
Compensation of Manager (Note 3) $ 508,235
Investor servicing, custodian fees and other expenses (Note 3) 25,790
Compensation of Trustees (Note 3) 5,972
Auditing 26,542
Legal 3,688
Postage 27,854
Administrative services (Note 3) 4,521
Amortization of organization expenses (Note 1) 2,839
Preferred stock auction fees 57,418
Total expenses 662,859
Net investment income 4,464,325
Net realized loss on investments (Notes 1 and 4) (2,199,180)
Net unrealized depreciation of investments during the period (4,687,738)
Net loss on investments (6,886,918)
Net decrease in net assets resulting from operations $(2,422,593)
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of changes in net assets
<TABLE>
<CAPTION>
Six months Year
ended ended
December 31 June 30
1994* 1994
<S> <C> <C>
Decrease in net assets
Operations:
Net investment income $ 4,464,325 $ 12,168,367
Net realized gain (loss) on investments (2,199,180) 3,759,973
Net realized loss on options -- (145,253)
Net unrealized depreciation of investments and options (4,687,738) (15,083,349)
Net increase (decrease) in net assets resulting from operations (2,422,593) 699,738
Distributions to auction preferred shareholders from:
Net investment income (335,392) (1,705,478)
Net realized gain on investments (393,469) --
Distributions to common shareholders from:
Net investment income (4,220,626) (11,297,391)
Net realized gain on investments (2,813,445) (4,144,541)
Decrease from capital share transactions (Note 2):
Auction preferred shares (25,000,000) (49,000,000)
Total decrease in net assets (35,185,525) (65,447,672)
Net assets
Beginning of period 142,628,559 208,076,231
End of period (including distributions in excess of net
investment income of $795,074 and $703,381, respectively) $107,443,034 $142,628,559
Number of fund shares
Common shares outstanding at beginning of period 10,821,255 10,821,255
Common shares issued in connection with reinvestment of
distributions -- --
Common shares outstanding at end of period 10,821,255 10,821,255
Auction preferred shares outstanding at beginning of period 250 740
Preferred shares repurchased (250) (490)
Auction preferred shares outstanding at end of period -- 250
</TABLE>
*Unaudited
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
Six months (commencement
ended of operations)
December 31 Year ended June 30 to June 30
1994* 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 10.84 $12.39 $11.38 $10.21 $10.26 $11.51+
Investment operations:
Net investment income .41 1.13 1.35 1.49 1.65 1.36
Net realized and unrealized
gain (loss) on investments (.63) (1.13) .97 1.15 .05 (1.31)
Total from investment
operations (.22) -- 2.32 2.64 1.70 .05
Less distributions from:
Net Investment Income
to preferred shareholders (.03) (.16) (.21) (.27) (.49) (.35)
to common shareholders (.39) (1.04) (1.08) (1.19) (1.25) (.92)
Net realized gains:
to preferred shareholders (.04) -- -- -- -- --
to common shareholders (.26) (.38) -- -- -- --
Paid in capital: (a)
to common shareholders -- -- -- -- (.04) --
Total distributions (.72) (1.58) (1.29) (1.46) (1.78) (1.27)
Change in cumulative
undeclared dividends on
remarketed preferred shares .03 .03 (.02) (.01) .03 (.03)
Net asset value, end of period $9.93 $10.84 $12.39 $11.38 $10.21 $10.26
Market value, end of period
(common shares) $8.625 $9.750 $11.875 $12.000 $10.375 $10.875
Total investment return
at market value
(common shares) (%) (b) (5.21)(d) (6.78) 8.27 28.71 8.41 (5.37)(d)
Net assets, end of period
(total fund) (in thousands) $107,443 $142,629 $208,076 $195,725 $182,003 $180,338
Ratio of expenses to average
net assets (%)(c) .59(d) 1.42 1.70 1.64 2.02 1.48(d)
Ratio of net investment income
to average net assets (%)(c) 3.92(d) 8.06 9.65 11.14 11.67 7.63(d)
Portfolio turnover rate (%) 8.59(d) 73.63 166.44 160.44 197.67 201.55(d)
</TABLE>
* Unaudited
+ 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) Ratios reflect net assets available to common shares only; net investment
income ratio also reflects reduction for dividend payments to preferred
shareholders.
(d) Not annualized.
<PAGE>
Notes to financial statements
Six months ended December 31, 1994 (Unaudited)
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) 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.
At December 31, 1994, the fund had a capital loss carryover of approximately
$4,596,000, which may be available to offset realized capital gains. This
amount will expire on December 31, 1999. To the extent that the capital loss
carryover is used to offset realized gains, it is unlikely that the gains so
offset will be distributed to shareholders, since any such distribution might
be taxable as ordinary income.
G) Distributions to shareholders Distributions to common and preferred
shareholders are recorded by the fund on the ex-dividend date. 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.
H) 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 plus interest. The remaining 250 shares were repurchased by the
fund at a value of $25,000,000 plus interest during the period ended December
31, 1994. There were no undeclared dividends on the Preferred
<PAGE>
Shares for the period ended December 31, 1994. The preferred shares were
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 remarketed 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 auctioned preferred shares and
the shares' rating agencies. Should these requirements not be met, or should
dividends accrued on the auctioned 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 auctioned preferred shares. At
December 31, 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 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 auctioned preferred shares during any dividend
payment period plus any expenses attributable to auctioned preferred shares
for that period exceed the fund's net income attributable to the proceeds of
the auctioned 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 auctioned 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.
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.
Investor servicing and custodian fees reported in the Statement of operations
for the six months ended December 31, 1994 have been reduced by credits
allowed by PFTC.
<PAGE>
Note 4
Purchases and sales of securities
During the six months ended December 31, 1994, purchases and sales of
investment securities other than short-term investments aggregated
$11,127,645 and $34,138,756, respectively. In determining the net gain or
loss on securities sold, the cost of securities has been determined on the
identified cost basis.
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 plus interest. The
remaining 250 shares were repurchased at a value of $25,000,000 plus interest
during the period ended December 31, 1994.
<PAGE>
Selected quarterly data
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
December 31 September 30 June 30 March 31 December 31
1994 1994 1994 1994 1993
<S> <C> <C> <C> <C> <C>
Total investment income
Total $2,480,140 $2,647,044 $2,962,961 $ 3,397,147 $3,742,849
Per Share* $.23 $.24 .28 $.32 $.34
Net investment income
available to common
shareholders
Total $2,115,133 $2,074,533 $2,235,583 $2,445,713 $2,650,334
Per Share* $ .20 $ .19 $ .21 $ .23 $.24
Net realized and
unrealized gain (loss)
on investments
Total $(5,514,255) $(1,372,663) $(4,497,219) $(7,942,482) $(3,456,693)
Per Share* $(.51) $(.12) (.48) $(.75) $(.31)
Net increase (decrease)
in assets resulting
from operations
Total $(3,399,122) $701,870 $(2,261,666) $(5,496,769) $(806,359)
Per Share* $(.31) $.07 $(.27) $(.52) $(.07)
Net assets available to
common shareholders at
the end of the period
Total $107,443,034 $115,932,585 $117,326,104 $121,879,941 $129,714,179
Per Share* $9.93 $10.71 $10.84 $11.26 $11.99
</TABLE>
*Per Common Share
<PAGE>
<TABLE>
<CAPTION>
Three months ended
September 30 June 30 March 31 December 31 September 30
1993 1993 1993 1992 1992
<S> <C> <C> <C> <C> <C>
Total investment income
Total $3,910,999 $4,736,892 $4,207,385 $3,946,509 $3,821,668
Per Share* $.36 $.43 $.25 $.42 $.45
Net investment income
available to common
shareholders
Total $3,131,259 $3,726,527 $3,025,708 $2,866,538 $2,691,014
Per Share* $ .29 $ .34 $.18 $.30 $.32
Net realized and
unrealized gain (loss)
on investments
Total $4,427,795 $505,766 $7,502,324 $(1,978,886) $3,891,731
Per Share* $.41 $.10 $.77 $(.20) $.30
Net increase (decrease)
in assets resulting
from operations
Total $7,559,054 $4,232,292 $10,528,032 $887,652 $6,582,745
Per Share* $.70 $.44 $.95 $.10 $.62
Net assets available to
common shareholders at
the end of the period
Total $138,962,635 $134,070,579 $132,162,069 $123,925,485 $125,606,247
Per Share* $12.84 $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.
Such distributions at times may exceed the current earnings of the fund,
resulting in a nontaxable return of capital to shareholders.
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>
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
TRUSTEES
George Putnam, Chairman
William F. 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. For more information
or to request a prospectus, call toll-free: 1-800-225-1581.
<PAGE>
Putnam Investments
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
056-16297
<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)
