Putnam
Dividend
Income
Fund
ANNUAL REPORT
June 30, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Bond yields have dropped considerably over the past several months,
creating a favorable environment for preferred securities. The
dividends-received deduction, which most of our shareholders claim,
makes the fund's after-tax yield extremely attractive."
-- Jeanne L. Mockard, manager
Putnam Dividend Income Fund
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
12 Portfolio holdings
16 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
In the volatile aftermath of last year's Asian financial crisis, preferred
stocks benefited from their inherent tendency to act like bonds, as many
equity investors sought the comparative safety of fixed-income securities. The
preferred market's relatively favorable position helped Putnam Dividend Income
Fund deliver positive performance at net asset value for the fiscal year ended
June 30, 1998.
Although the fund does not normally invest in trust-preferred stocks because
they don't qualify for the corporate dividends-received tax deduction, its
shareholders were indirect beneficiaries, as steady issuance of these
securities curtailed the supply of the traditional preferreds in which the
fund invests and hence drove their prices higher.
In the following report, Fund Manager Jeanne Mockard provides more details
about fiscal 1998's performance and takes a look at prospects for the months
ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
August 19, 1998
Report from the Fund Manager
Jeanne L. Mockard
For much of the past 12 months, a combination of solid economic growth, tight
labor markets, and rising housing prices left investors guessing as to the
Federal Reserve Board's next move. By spring, however, falling import and
commodity prices precipitated by the Asian financial crisis made it clear that
interest rates weren't likely to rise at any time soon. Meanwhile, reported
earnings came under pressure in industries with direct links to Asia, igniting
a general flight to quality that benefited long-term Treasury bonds and a
handful of large, defensive stocks.
Preferred stocks generally benefited from this uncertain environment, as
investors sought safe havens from earnings instability. Although technically
they are equity securities, preferred stocks tend to perform in line with
bonds. Due in part to the increased demand for preferred stocks, Putnam
Dividend Income Fund provided a total return of 13.14% at net asset value and
8.22% at market price for the 12 months ended June 30, 1998. For complete
performance information, please refer to the summary that begins on page 9.
* DEMAND CONTINUES TO OUTSTRIP SUPPLY
Several factors tipped the supply/demand equation in the fund's favor this
year. Among them was President Clinton's proposal to reduce the
dividends-received deduction for corporations from 70% to 50%. Although the
legislation failed to pass, the prospect that it might become law caused a
slowdown in the overall issuance of preferred stocks during the year. As
issuance slowed, demand for existing preferreds increased. Your fund's
portfolio of relatively high-coupon securities benefited as a result.
Meanwhile, the existence of trust-preferred stocks continued to have a
positive impact on the fund, even though we do not normally invest in these
securities. Issued by banks and insurance companies, trust-preferred stocks
have the advantage of being classified as equity on an issuer's balance sheet,
while the dividends are treated as a tax-deductible expense. As a result, it
can be less costly for a company to issue trust-preferred stocks than other
types of preferred stocks. (Among the 1997 budget proposals that did not pass
was one designed to eliminate the deductibility of these dividends.)
Your fund's portfolio does not currently include trust-preferred stocks
because they do not qualify for the dividends-received deduction -- an
important benefit for many of the fund's shareholders. Nevertheless, their
emerging popularity among issuers has influenced the portfolio's composition.
As more corporations issue trust-preferred stock, the types of securities in
which your fund invests have become relatively scarce -- and their prices
have, accordingly, risen. In this environment, we sought to hold securities in
the portfolio for as long as possible to take full advantage of this
appreciation.
* STRATEGY AIMED AT REDUCING CALLS
Keeping the fund's holdings was easier said than done. The decline in U.S.
bond yields over the year prompted many issuers of preferred stock --
specifically issuers of adjustable-rate and sinking-fund preferreds -- to
recall existing issues. A number of your fund's holdings were called away
during this period.
Ford Motor Company, formerly one of the fund's top holdings, is an example.
Ford presented us with an attractive tender offer to buy back its preferred
stock at a price considerably above its current market value. Boise Cascade is
another stock that was called away at a premium.
[GRAPHIC OMITTED: horizontal bar chart of COMPARATIVE PORTFOLIO COMPOSITION]
COMPARATIVE PORTFOLIO COMPOSITION*
6/30/97 6/30/98
Perpetual
preferreds 61.8% 74.9%
Adjustable-rate
preferreds 18.8% 15.2%
Short-term
securities 8.8% 1.2%
Sinking-fund
preferreds 4.7% 5.7%
Common stocks 3.4% 0.0%
Convertible
preferreds 1.7% 3.1%
Footnote reads:
* Based on net assets as of 6/30/97 and 6/30/98. Holdings will vary over time.
Calls interrupt the fund's stream of income, requiring us to reinvest the
assets in securities that may pay lower rates than those issued years ago.
Given the fund's objective of generating a high level of income, we have
sought to reduce the fund's susceptibility to calls, since they would
ultimately result in a lower portfolio yield. Whenever possible, we traded out
of issues carrying call dates within the near future and took advantage of
opportunities to strengthen our position in perpetual preferreds with some
call protection.
Perpetuals carry a fixed rate of interest and no maturity date --
characteristics that increase their value during periods of declining interest
rates. ("Sinkers," or sinking-fund preferreds, also have fixed rates, but at a
certain age they are retired on a predetermined schedule, making them
relatively less desirable.) The fund's sizable position in perpetual
preferreds contributed to its 5.66% dividend yield at net asset value at the
end of June.
* FUND REMAINS UNLEVERAGED
Early in the period, we decided to eliminate the fund's leverage by redeeming
all outstanding auction-rate preferred shares. A frequently employed tool
throughout your fund's investment history, leverage refers to the process of
issuing money market securities at prevailing short-term rates and investing
the proceeds in longer-term, higher-yielding securities. We have used leverage
on several occasions in the past when a particularly wide spread existed
between short- and long-term interest rates. Generally the result has been a
higher level of income and a correspondingly greater total return.
In an environment in which short-term interest rates are moving higher,
however, leverage can work against the fund as the level of income paid to
preferred shareholders increases. Considering the strength of economic
activity and the possibility of further rate increases by the Federal Reserve
Board, a recommendation was made to the fund's Trustees -- which they approved
- -- that the fund be de-leveraged, effective July 21, 1997.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
El Paso Tennessee Pipeline Co., Series A, $4.125 cumulative
preferred
Oil and gas
Duke Power Co., Series W, $7.00 cumulative preferred
Electric utilities
Merrill Lynch & Co., Inc., Series A, $2.25 deposit-shares cumulative
preferred
Financial services
McDermott Inc., Sinking Fund Series B, $2.60 cumulative
preferred
Oil services
Baltimore Gas & Electric Co., $6.99 cumulative preferred
Combined utilities
General Motors Corp., Series G, $2.275 deposit-shares cumulative
preferred
Automobiles
IBM Corp., Series A, $1.875 deposit-shares preferred
Computer software
Chase Manhattan Corp., Series L, $4.83 cumulative
adjustable-rate preferred
Banks
Lehman Brothers Holdings, Inc., $5.00 convertible preferred
Financial services
Fleet Financial Group, Inc., Series E, $2.338 deposit-shares
cumulative preferred
Banks
These holdings represent 35.6% of the fund's net assets as of 6/30/98.
Portfolio holdings will vary over time. While these holdings, along with
others discussed in this report, were viewed favorably at the end of the
fiscal period, all are subject to review and adjustment in accordance with
the fund's investment strategy.
As it turned out, short-term interest rates did not move higher, but our
decision nevertheless served the fund well. The bond market rally that started
last summer pushed long-term yields lower, effectively eliminating the spread
between long- and short-term interest rates and thus the advantage of having
leverage in the portfolio. Given the direction of long-term rates, we
maintained the fund's de-leveraged status throughout the period and have no
plans to change it over the near term.
* SLOWER ECONOMY ANTICIPATED; FIXED INCOME SECURITIES LIKELY TO BENEFIT
After months of uncertainty, it is now clear that Asia's slowdown is having an
impact on the U.S. economy. In April, the U.S. trade deficit widened to a
record $14.5 billion, masking an even greater gap with Pacific Rim nations as
the dollar reached new highs against the yen. In June, manufacturing activity
declined for the first time in nearly two years.
While it is impossible to predict the extent of Asia's impact, any slowing in
the U.S. economy should be favorable for bond prices. The preferred market
should benefit in turn as declining rates prompt corporations to continue to
call in existing issues and as demand for preferreds outpaces supply. We do
not expect preferreds to suffer as the result of any impact on their
underlying businesses, since most preferred stock issuers have primarily
domestic operations.
We will continue to look for opportunities to increase the fund's call
protection. Although there can be no assurance, we believe the current
environment, combined with the attractive holdings in your fund's portfolio,
will continue to benefit the fund in the months ahead.
* CONSIDERATION OF TENDER OFFER
Under the fund's charter documents, the Trustees are required to consider a
tender offer for the fund's common shares if the shares trade at a discount of
more than 10% over the last 12 weeks of a fiscal year. This requirement was
triggered for fiscal 1998. At their meeting in July the Trustees reviewed
whether making a tender offer for the fund's shares would be in the interests
of shareholders. Although a tender offer might reduce discounts in the short
term, the Trustees were concerned that it would be unlikely to have any
long-term effect on share trading discounts. Furthermore, a tender offer would
result in a smaller fund with higher expense ratios and lower yields. As a
result of these concerns, the Trustees concluded that making a tender offer
would not be in the interests of shareholders.
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 6/30/98, there is no guarantee the fund will continue to hold
these securities in the future.
Performance summary
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 eligible for the dividends-received
deduction, consistent with preservation of capital.
TOTAL RETURN FOR PERIODS ENDED 6/30/98
Merrill Lynch
Perpetual
Market Preferred Consumer
NAV price Index Price Index
- -----------------------------------------------------------------------
1 year 13.14% 8.22% 8.81% 1.68%
- -----------------------------------------------------------------------
5 years 51.53 41.40 42.63 12.88
Annual average 8.67 7.17 7.36 2.45
- -----------------------------------------------------------------------
Life of fund 149.38 102.18 128.85 30.40
Annual average 11.01 8.38 9.93 3.08
- -----------------------------------------------------------------------
Performance data represent past results and do not reflect future
performance. They do not take into account any adjustment for taxes
payable on reinvested distributions. Investment returns, net asset value
and market price will fluctuate so that an investor's shares when sold may
be worth more or less than their original cost.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 6/30/98
- ------------------------------------------------------------------------------
Distributions (common shares)
- ------------------------------------------------------------------------------
Number 12
- ------------------------------------------------------------------------------
Income $0.71
- ------------------------------------------------------------------------------
Total $0.71
- ------------------------------------------------------------------------------
Preferred shares Series A (600 shares)
- ------------------------------------------------------------------------------
Income $560.74
- ------------------------------------------------------------------------------
Total $560.74
- ------------------------------------------------------------------------------
Share value (common shares) NAV Market price
- ------------------------------------------------------------------------------
6/30/97 $11.23 $10.500
- ------------------------------------------------------------------------------
6/30/98 11.88 10.625
- ------------------------------------------------------------------------------
Current return (common shares) NAV Market price
- ------------------------------------------------------------------------------
End of period
- ------------------------------------------------------------------------------
Current dividend rate1 5.66% 6.32%
- ------------------------------------------------------------------------------
Taxable equivalent2 8.25 9.23
- ------------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by NAV
or market value at end of period.
2Assumes 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 corporations, investment income may also be subject to the
federal alternative minimum tax.
TERMS AND DEFINITIONS
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 in the fund.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, 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.
COMPARATIVE BENCHMARKS
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. It is not possible to invest directly in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
Report of independent accountants
For the fiscal year ended June 30, 1998
To the Trustees and Shareholders of
Putnam Dividend Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Putnam Dividend
Income Fund (the "fund") at June 30, 1998, and the results of its operations,
the changes in its net assets and the financial highlights for the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of investments owned at June 30, 1998 by correspondence with the
custodian and the application of alternative auditing procedures where
investments purchased were not yet received by the custodian, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
August 13, 1998
Portfolio of investments owned
June 30, 1998
<TABLE>
<CAPTION>
PREFERRED STOCKS (95.8%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
Automobiles (4.8%)
- -------------------------------------------------------------------------------------------------------------
71,620 General Motors Corp. Ser. B,
$2.281 dep. shs. cum. pfd. $ 1,906,883
149,178 General Motors Corp. Ser. G,
$2.275 dep. shs. cum. pfd. 4,251,573
--------------
6,158,456
Banks (12.5%)
- -------------------------------------------------------------------------------------------------------------
70,000 Bankers Trust New York Corp. Ser. Q,
$1.269 cum. Adjustable Rate Preferred (ARP) (CUS) 1,758,750
40,000 Chase Manhattan Corp. Ser. L, $4.83 cum. ARP 3,940,000
62,300 Chase Manhattan Corp. Ser. C, $2.71 cum. pfd. 1,923,513
19,000 Chase Manhattan Corp. Ser. B, $2.44 cum. pfd. 522,500
10,000 Citicorp Ser. 8-B, $8.25 cum. pfd. 1,052,500
13,000 Citicorp Ser. 19, $1.25 cum. ARP 328,250
10,000 Fleet Financial Group, Inc. Ser. VI, $3.375 cum. pfd. 585,000
110,566 Fleet Financial Group, Inc. Ser. E,
$2.338 dep. shs. cum. pfd. 3,123,490
71,000 Fleet Financial Group, Inc. Ser. V,
$1.813 dep. shs. cum. pfd. 1,979,125
16,500 Wells Fargo & Co. Ser. B, $2.75 cum. ARP 829,125
--------------
16,042,253
Broadcasting (0.9%)
- -------------------------------------------------------------------------------------------------------------
49,000 Newscorp Overseas Corp. Ser. A, $2.156 cum. pfd. 1,212,750
Chemicals (0.7%)
- -------------------------------------------------------------------------------------------------------------
5,050 du Pont (E.I.) de Nemours & Co., Ltd. Ser. B,
$4.50 cum. pfd. 446,925
6,000 du Pont (E.I.) de Nemours & Co., Ltd. Ser. A,
$3.50 cum. pfd. 408,750
--------------
855,675
Combined Utilities (15.2%)
- -------------------------------------------------------------------------------------------------------------
23,900 Baltimore Gas & Electric Co. Ser. 93, $7.125 cum. pfd. 2,721,613
40,000 Baltimore Gas & Electric Co. $6.99 cum. pfd. 4,525,000
10,000 Baltimore Gas & Electric Co. Ser. 93, $6.70 cum. pfd. 1,130,000
20,000 Florida Power & Light Co. Ser. S, $6.98 cum. pfd. 2,275,000
8,500 Florida Power & Light Co. Ser. U, $6.75 cum. pfd. 960,500
108,500 New York State Electric & Gas Corp. Ser. B,
$1.243 cum. ARP 2,726,063
72,700 Pacific Gas & Electric Co. Ser. U, $1.76 cum. pfd. 1,999,250
2,500 Pacificorp Sinking Fund $7.70 cum. pfd. 272,500
6,750 Public Service Electric & Gas Co. $6.92 cum. pfd. 734,906
14,000 San Diego Gas & Electric Co. $1.763 cum. pfd. 386,750
67,000 San Diego Gas & Electric Co. $1.70 cum. pfd. 1,834,125
--------------
19,565,707
Computer Software (3.2%)
- -------------------------------------------------------------------------------------------------------------
149,000 IBM Corp. Ser. A, $1.875 dep. shs. pfd. 4,153,375
Consumer Services (0.3%)
- -------------------------------------------------------------------------------------------------------------
5,000 Western Resources, Inc. $4.25 cum. pfd. 345,000
Electric Utilities (22.9%)
- -------------------------------------------------------------------------------------------------------------
100,100 Alabama Power Co. Ser. 93-A, $1.19 cum. ARP 2,515,013
20,000 Appalachian Power Co. $5.92 cum. pfd. 2,020,000
50,000 Connecticut Light & Power Co. Sinking Fund
Ser. 92, $3.615 cum. pfd. 2,162,500
18,000 Duke Power Co. Ser. S, $7.85 cum. pfd. 2,081,250
50,825 Duke Power Co. Ser. W, $7.00 cum. pfd. 5,813,109
5,924 Entergy Arkansas, Inc. $8.52 cum. pfd. 592,400
8,916 Entergy Gulf States, Inc. $7.56 cum. pfd. 888,257
9,000 Entergy Louisiana, Inc. $7.00 cum. pfd. 913,500
100,000 Georgia Power Co. Ser. 93-2, $1.198 cum. ARP 2,500,000
20,000 Niagara Mohawk Power Corp. $2.375 cum. pfd. 527,500
15,200 Niagara Mohawk Power Corp. Ser. A,
$1.625 cum. ARP 359,100
20,000 Northern Indiana Public Services Ser. A,
$3.0 cum. ARP 1,025,000
18,650 Peco Energy $7.48 cum. pfd. 1,939,600
9,360 Puget Sound Energy, Inc. Ser. III, $2.125 cum. pfd. 244,530
10,000 Texas Utilities Electric Co. $6.375 cum. pfd. 1,015,000
75,580 Texas Utilities Electric Co. Ser. A,
$1.875 dep. shs. cum. pfd. 2,002,870
25,000 Texas Utilities Electric Co. Ser. B,
$1.805 dep. shs. cum. pfd. 671,875
20,000 Virginia Electric & Power Co. $6.98 cum. pfd. 2,217,500
--------------
29,489,004
Financial Services (17.7%)
- -------------------------------------------------------------------------------------------------------------
35,000 Bear Stearns Companies, Inc. Ser. E, $3.075 cum. pfd. 1,890,000
17,000 Bear Stearns Companies, Inc. Ser. F, $2.86 cum. pfd. 879,750
14,000 Bear Stearns Companies, Inc. Ser. A, $2.75 cum. ARP 700,000
20,000 Bear Stearns Companies, Inc. Ser. G, $2.745 cum. pfd. 994,000
10,000 Donaldson, Lufkin & Jenrette, Inc. Ser. B,
$2.65 cum. pfd. 516,250
52,000 Heller Financial Inc. Ser. A, $2.031 cum. pfd. 1,384,500
45,850 Household International, Inc. Ser. 92-A,
$2.063 dep. shs. cum. pfd. 1,346,844
5,000 Lehman Brothers Holding, Inc. Ser. C, $2.97 pfd. 262,500
49,500 MBNA Corp. Ser. A, $1.875 cum. pfd. 1,342,688
40,000 MBNA Corp. Ser. B, $1.462 cum. ARP 1,030,000
166,252 Merrill Lynch & Co., Inc. Ser. A,
$2.25 dep. shs. cum. pfd. 5,236,938
19,000 Morgan (J.P.) & Co., Inc. Ser. A, $5.00 cum. ARP 1,824,000
52,000 Morgan (J.P.) & Co., Inc. Ser. H,
$3.313 dep. shs. cum. pfd. 2,847,000
45,000 Morgan Stanley $3.875 dep. shs. cum. pfd. 2,491,875
--------------
22,746,345
Insurance (3.9%)
- -------------------------------------------------------------------------------------------------------------
54,000 Travelers Group, Inc. $3.183 pfd. 2,976,750
26,500 Travelers Group, Inc. Ser. M, $2.932 cum. pfd. 1,384,625
25,000 Travelers Group, Inc. Ser. K, $2.1 cum. pfd. 681,250
--------------
5,042,625
Metals and Mining (0.5%)
- -------------------------------------------------------------------------------------------------------------
8,450 Aluminum Co. $3.75 cum. pfd. 618,963
Oil and Gas (6.1%)
- -------------------------------------------------------------------------------------------------------------
20,000 Anadarko Petroleum Corp. $5.46 pfd. 1,942,500
105,000 El Paso Tennessee Pipeline Co. Ser. A,
$4.125 cum. pfd. 5,866,875
--------------
7,809,375
Oil Services (6.1%)
- -------------------------------------------------------------------------------------------------------------
111,000 LASMO PLC ADS Ser. A, $2.50 cum. pfd.
(United Kingdom) 2,983,121
161,448 McDermott Inc. Sinking Fund Ser. B, $2.60 cum. pfd. 4,903,983
--------------
7,887,104
Water Utilities (1.0%)
- -------------------------------------------------------------------------------------------------------------
12,000 United Water Resources, Inc. Ser. B,
$7.625 cum. pfd. 1,234,500
--------------
Total Preferred Stocks (cost $117,018,491) $ 123,161,132
CONVERTIBLE PREFERRED STOCKS (3.0%) (a) (cost $2,677,115)
NUMBER OF SHARES VALUE
- -------------------------------------------------------------------------------------------------------------
109,270 Lehman Brothers Holding, Inc. $5.00 cv. pfd. $ 3,933,720
SHORT-TERM INVESTMENTS (1.2%) (a) (cost $1,540,248)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
$ 1,540,000 Interest in $750,000,000 joint repurchase agreement
dated June 30, 1998 with Goldman Sachs due
July 1, 1998 with respect to various U.S. Treasury
obligations -- maturity value of $1,540,248 for an
effective yield of 5.8% $ 1,540,248
- -------------------------------------------------------------------------------------------------------------
Total Investments (cost $121,235,854) (b) $ 128,635,100
- -------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $128,600,609.
(b) The aggregate identified cost on a tax basis is $121,239,313, resulting in gross unrealized
appreciation and depreciation of $8,229,160 and $833,373, respectively, or net unrealized appreciation
of $7,395,787.
(CUS) This entity provides subcustodian services to the fund.
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.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
June 30, 1998
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $121,235,854) (Note 1) $128,635,100
- ---------------------------------------------------------------------------------------------------
Cash 606
- ---------------------------------------------------------------------------------------------------
Dividends and interest receivable 848,991
- ---------------------------------------------------------------------------------------------------
Total assets 129,484,697
Liabilities
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 605,990
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 238,864
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 19,531
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 10,992
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,660
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 7,051
- ---------------------------------------------------------------------------------------------------
Total liabilities 884,088
- ---------------------------------------------------------------------------------------------------
Net assets $128,600,609
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital -- common shares (Unlimited shares authorized;
10,821,255 shares outstanding) (Note 1) $122,164,096
- ---------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (302,300)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (660,433)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 7,399,246
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $128,600,609
Computation of net asset value
- ---------------------------------------------------------------------------------------------------
Net asset value per share ($128,600,609 divided by 10,821,255 shares) $11.88
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended June 30, 1998
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Dividends (net of foreign tax $41,647) $ 8,504,641
- --------------------------------------------------------------------------------------------------
Interest 190,737
- --------------------------------------------------------------------------------------------------
Total investment income 8,695,378
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 969,368
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 161,021
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 13,037
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,646
- --------------------------------------------------------------------------------------------------
Reports to shareholders 44,622
- --------------------------------------------------------------------------------------------------
Auditing 21,240
- --------------------------------------------------------------------------------------------------
Legal 4,419
- --------------------------------------------------------------------------------------------------
Postage 35,223
- --------------------------------------------------------------------------------------------------
Exchange listing fees 24,260
- --------------------------------------------------------------------------------------------------
Other 1,256
- --------------------------------------------------------------------------------------------------
Total expenses 1,281,092
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (22,778)
- --------------------------------------------------------------------------------------------------
Net expenses 1,258,314
- --------------------------------------------------------------------------------------------------
Net investment income 7,437,064
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 4,105,390
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 3,320,443
- --------------------------------------------------------------------------------------------------
Net gain on investments 7,425,833
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $14,862,897
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended June 30
--------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 7,437,064 $ 11,368,174
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 4,105,390 614,252
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 3,320,443 6,446,464
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 14,862,897 18,428,890
Distributions to preferred shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income (336,444) (2,295,402)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations applicable to common shareholders
(excluding cumulative undeclared dividends on
remarketed preferred shares of $--
and $186,117 respectively) 14,526,453 16,133,488
Distributions to common shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income (7,683,270) (8,440,000)
- ----------------------------------------------------------------------------------------------------------------------
Decrease from capital shares transaction
- ----------------------------------------------------------------------------------------------------------------------
Auction preferred shares (Note 4) (60,000,000) --
- ----------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (53,156,817) 7,693,488
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 181,757,426 174,063,938
- ----------------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of
net investment income and undistributed net
investment income of $302,300 and
$280,350, respectively) $128,600,609 $181,757,426
Number of fund shares
- ----------------------------------------------------------------------------------------------------------------------
Common shares outstanding at
beginning and end of year 10,821,255 10,821,255
- ----------------------------------------------------------------------------------------------------------------------
Auction preferred shares outstanding at
beginning of year 600 600
- ----------------------------------------------------------------------------------------------------------------------
Auction preferred shares outstanding at
end of year -- 600
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended June 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year
(common shares) $11.23 $10.54 $10.57 $10.84 $12.39
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .69 1.05 .80 .78 1.13
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .68 .65 .03 .01 (1.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.37 1.70 .83 .79 --
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net investment income
- ------------------------------------------------------------------------------------------------------------------------------------
To preferred shareholders (.01) (.23) (.07) (.01) (.16)
- ------------------------------------------------------------------------------------------------------------------------------------
To common shareholders (.71) (.78) (.72) (.78) (1.04)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gains
- ------------------------------------------------------------------------------------------------------------------------------------
To preferred shareholders -- -- -- (.06) --
- ------------------------------------------------------------------------------------------------------------------------------------
To common shareholders -- -- -- (.24) (.38)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.72) (1.01) (.79) (1.09) (1.58)
- ------------------------------------------------------------------------------------------------------------------------------------
Auction preferred
share offering cost -- -- (.07) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Change in cumulative
undeclared dividends
on auction preferred shares -- -- -- .03 .03
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year
(common shares) $11.88 $11.23 $10.54 $10.57 $10.84
- ------------------------------------------------------------------------------------------------------------------------------------
Market value, end of year
(common shares) $10.625 $10.500 $8.875 $9.250 $9.750
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return at
market value (common shares) (%)(a) 8.22 27.88 3.51 5.82 (6.78)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year
(total fund) (in thousands) $128,601 $181,757 $174,064 $114,357 $142,629
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(c) 1.02 1.51 1.23 1.07 1.42
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(b) 5.77 7.57 6.88 7.39 8.06
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 30.63 19.27 35.13 27.39 73.63
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid (d) $.0500 $.0500
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Ratios reflect net assets available to common shares only; net investment income ratio also reflects
reduction for dividend payments to preferred shareholders.
(c) The ratio of expenses to average net assets for the year ended June 30, 1996 and thereafter, includes
amounts paid through expense offset arrangements. Prior period ratios exclude these
amounts (Note 2).
(d) Average commission rate paid on security trades is required for fiscal periods beginning on or after
September 1, 1995.
</TABLE>
Notes to financial statements
June 30, 1998
Note 1
Significant accounting policies
Putnam Dividend Income Fund ("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 the dividends received deduction allowed to corporations under
Section 243 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 Investment Management, Inc. ("Putnam Management"), the fund's Manager,
a wholly-owned subsidiary of Putnam Investments, Inc. The fund may also use
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
preparation of financial statements is in conformity with generally accepted
accounting principles and requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities. Actual
results could differ from those estimates.
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. Certain
preferred stocks for which reliable 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 and certain other accounts managed by Putnam Management.
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 its
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. Putnam Management 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.
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, less all
liabilities, 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. Dividend income
is recorded on the ex-dividend date.
F) Federal taxes It is the policy of the fund to distribute all of its taxable
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, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
At June 30, 1998, the fund had a capital loss carryover of approximately
$657,000 available to offset future net capital gain, if any, which will
expire on June 30, 2004.
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. These differences include a temporary difference of dividends
payable. 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, 1998,
the fund required no such reclassifications.
Note 2
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. 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% thereafter.
The fund reimburses Putnam Management an allocated amount 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.
Custodial functions for the fund's assets 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.
For the year ended June 30, 1998, fund expenses were reduced by $22,778 under
expense offset arrangements with PFTC. Investor servicing and custodian fees
reported in the Statement of operations exclude these credits. The fund could
have invested a portion of the assets utilized in connection with the expense
offset arrangements in an income producing asset if it had not entered into
such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $540 has
been allocated to the fund, and an additional fee for each Trustee's meeting
attended. Trustees who are not interested persons of Putnam Management and who
serve on committees of the Trustees receive additional fees for attendance at
certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which
allows the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund and are
invested in certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of Trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
Note 3
Purchase and sales of securities
During the year ended June 30, 1998, purchases and sales of investment
securities other than short-term investments aggregated $39,187,625 and
$83,866,378, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the identified cost basis.
Note 4
Auction preferred shares
On July 21, 1997, 600 preferred shares were redeemed by the fund at a
redemption price of $60,000,000 plus $336,444 of cumulative and unpaid
dividends.
The 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
dividend accumulated on a daily basis but unpaid through the redemption date
(whether or not such dividends have been declared).
Under the Investment Act of 1940, the fund is required to maintain asset
coverage of at least 200% with respect to 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 terms of the auction
preferred shares and the shares' rating agencies. Should these requirements
not be met, or should these dividend accrued on the remarketed preferred 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 remarketed
preferred shares. At June 30, 1998, no such restrictions have been placed on
the fund.
Federal Tax Information
(Unaudited)
The fund has designated 100% of the distributions from net investment income
as qualifying for the dividends received deduction for corporations.
The Form 1099 you receive in January 1999 will show the tax status of all
distributions paid to your account in calendar 1998.
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
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
William J. Curtin
Vice President
Jeanne L. Mockard
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or visit our
website (www.putnaminv.com) any time for up-to-date information about the
fund's NAV.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
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44638-056 6/98
