Putnam
Dividend
Income
Fund
SEMIANNUAL REPORT
December 31, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "The current turmoil in Asia remains an ongoing concern in early 1998.
While we remain alert to potential risks, we also recognize that a
moderately slower U.S. economy, which some scenarios anticipate,
could help to keep domestic interest rates low and provide support
for the U.S. preferred market."
-- Jeanne L. Mockard, manager
Putnam Dividend Income Fund
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
12 Portfolio holdings
15 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Although they are technically equities, preferred stocks act more like
bonds. This anomaly worked to the advantage of Putnam Dividend Income
Fund during the six months ended December 31, 1997. As the stock
market continued to experience volatility that was sharply heightened
in October in the wake of a global securities market disruption, the
U.S. fixed-income market enjoyed relative calm. In fact, it fairly
boomed following the collapse of a number of Asian currencies as
investors dashed to the relative safety of U.S. bonds.
What Congress chose not to do also worked to your fund's benefit
during fiscal 1997. Legislators rejected proposals that would have
curtailed two existing tax breaks that heavily influence the preferred
stocks in which your fund invests. In the following report, Fund
Manager Jeanne Mockard explains how the global market disruption and
the congressional decisions related to your fund's performance during
the fiscal year's first half. Then she offers insights into prospects
for the months ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
February 18, 1998
Report from the Fund Manager
Jeanne L. Mockard
Putnam Dividend Income Fund had luck on its side during the first half
of fiscal 1998. Federal budget proposals that could have negatively
affected securities held by the fund failed to pass, and an economic
crisis in Asia turned out to hold short-term benefits for U.S.
preferreds. The fund provided a total return of 7.16% at net asset
value for the six months ended December 31, 1997 (1.80% at market
price) against a backdrop of rising bond prices and the prospect of
weaker U.S. fundamentals. Complete performance information is provided
on pages 9 and 10.
* RISING MARKET FAVORS FIXED-RATE PREFERREDS
After climbing in the spring on fears of inflation, U.S. interest
rates dropped steadily in the fall and winter of 1997. Economic growth
was healthy throughout the year, but all signs of inflation disappeared
as spring rounded into summer. In the fall, turmoil in the emerging
markets prompted increasing demand for U.S. bonds and preferred stocks
as investors looked for a safe haven from equity market volatility.
The resulting decline in U.S. bond yields prompted many issuers of
preferred stock -- specifically, issuers of perpetual and sinking-fund
preferreds -- to recall existing issues.
A number of your fund's holdings faced calls by their issuers during
this period, prompting us to sell them and thereby reducing the total
number of issues in the portfolio. To maintain the fund's call
protection, we replaced those positions with perpetual preferreds.
Perpetuals carry a fixed rate of interest and no maturity date --
characteristics that increase their value during periods of declining
interest rates. (Sinking-fund preferreds, or "sinkers," also have
fixed rates, but at a certain age they are retired on a predetermined
schedule.) The fund's sizable position in perpetual preferreds
contributed to its favorable total return for the period.
One perpetual preferred stock we added to the portfolio during this
period was a du Pont issue. After several years of solid financial
performance, this multinational chemical company recently restructured
in an effort to solidify its core businesses. The availability of the
stock -- which had been issued some time ago -- was an unexpected
opportunity. While this portfolio holding was viewed favorably at the
end of the period, all holdings are subject to review and adjustment
in accordance with the fund's investment strategy and will vary in the
future.
* BUDGET PROPOSALS FAIL TO PASS
President Clinton's budget proposals to change certain types of
preferred stocks failed to become law this year. As we reported
earlier, the President had reintroduced proposals that would eliminate
the tax deductibility of interest on some securities. Most relevant
for the fund was a proposal to reduce the dividends-received deduction
for corporations from 70% to 50%. The prospect of this legislation
becoming law caused a slowdown in the overall issuance of preferred
stocks during the period. As issuance slowed, demand for existing
preferreds increased. Your fund's portfolio of relatively high-coupon
securities benefited as a result.
[GRAPHIC OMITTED: horizontal bar chart COMPARATIVE PORTFOLIO COMPOSITION]
COMPARATIVE PORTFOLIO COMPOSITION*
Perpetual preferreds 61.8% 67.2%
Adjustable-rate preferreds 18.8% 20.2%
Sinking-fund preferreds 4.7% 7.4%
Common stocks 3.4% 0.0%
Convertible preferreds 1.7% 2.8%
Cash and short-term securities 8.8% 3.6%
Footnote reads:
*Based on net assets as of 6/30/97 and 12/31/97. Holdings will vary
over time.
Meanwhile, legislation that passed more than a year ago continued to
have a positive impact on the fund. In 1996, the legislation that
created trust-preferred stocks also stated that the dividends paid by
issuers of these securities were tax deductible. 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, and so their favored status has not been affected.
Your fund does not invest in trust-preferred stocks because these
securities do not qualify for the dividends-received deduction -- an
important benefit for many of the fund's shareholders. However, the
mere existence of these new securities has served as a catalyst within
the preferred market and in turn has influenced the portfolio. As more
corporations issue trust-preferred stock, the types of securities in
which your fund invests have become relatively scarce. Given the
heightened demand for preferreds this year, this scarcity has
translated into higher prices for the fund's holdings. In this
environment, we sought to hold securities in the portfolio for as long
as possible to take full advantage of this appreciation.
As we reported in your fund's annual report for fiscal 1997, after
receiving the approval of the fund's Trustees, we eliminated the use
of leverage. The repurchase of the fund's preferred shares was
completed on July 21, 1997.
* ASIAN CRISIS IMPACT ON U.S. MARKETS STILL UNDETERMINED
The biggest economic event of the second half of 1997 was the reversal
of fortune in Asia. Beginning this summer, the currencies of several
Southeast Asian countries crumbled under competitive pressures from
China and Japan. Weak current account balances were revealed, and a
number of fiscal policy missteps sent investors fleeing for the exits.
The question is, how will the Asian crisis affect U.S. markets? We
believe the domestic preferred market will benefit, given the tendency
of preferred stocks to behave like bonds. Economic growth in Asia will
certainly slow, leading to fewer imports of U.S. manufactured goods.
The slackened demand for imports will be compounded by the new
exchange rates with the U.S. dollar (and therefore U.S. manufactured
goods) now vastly more expensive relative to Asian currencies. Already
the index of purchasing managers has registered two consecutive months
of slowing growth in factory exports, while imports of parts have
accelerated at a record pace.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
McDermott, Inc. Series B, $2.60 sinking-fund cumulative preferred
Oil services
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
Ford Motor Co. Series B, $2.063 deposit-shares
cumulative preferred
Automobiles
Merrill Lynch & Co., Inc. Series A, $2.25 deposit-shares
cumulative preferred
Finance
Chase Manhattan Corp. Series L, $5.082
cumulative adjustable-rate preferred
Banks
Baltimore Gas & Electric Co., $6.99 cumulative preferred
Combined utilities
Lehman Brothers Holding, Inc., $1.955 convertible preferred
Finance
General Motors Corp., Series G, $2.28 cumulative preferred
Automobiles
Fleet Financial Group, Inc. Series E, $2.338 deposit-shares
cumulative preferred
Banks
Footnote reads:
These holdings represent 37.4% of the fund's net assets as of
12/31/97. Portfolio holdings will vary over time.
While the long-term effects of the Asian crisis are yet to be
determined, 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 preferred stocks to suffer as the result of any
impact on their underlying businesses, since most are purely domestic.
Utility preferreds are a good example. Bank preferreds issued by banks
that conduct business in Asia should benefit from their issuers'
cooperation with weakened Asian banks, which will undoubtedly need
external sources of financing in the months to come.
In 1998, we will continue to look for opportunities to increase the
fund's call protection. While we do not expect interest rates to fall
indefinitely, maintaining call-protected positions gives us more
maneuverability to adjust the portfolio as conditions warrant. We
believe the current environment, combined with the income potential of
your fund's holdings, will prove beneficial in the months ahead.
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 12/31/97, 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 12/31/97
Merrill Lynch
Perpetual
Market Preferred Consumer
NAV price Index Price Index
- ---------------------------------------------------------------------
6 months 7.16% 1.80% 5.66% 0.62%
- ---------------------------------------------------------------------
1 year 14.00 15.41 9.99 1.70
- ---------------------------------------------------------------------
5 years 60.91 34.42 47.30 13.67
Annual average 9.98 6.09 8.05 2.60
- ---------------------------------------------------------------------
Life (9/28/89) 136.20 90.18 122.22 29.04
Annual average 10.97 8.09 10.16 3.14
- ---------------------------------------------------------------------
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
6 months ended 12/31/97
- ---------------------------------------------------------------------
Distributions (common shares)
- ---------------------------------------------------------------------
Number 6
- ---------------------------------------------------------------------
Income $0.374
- ---------------------------------------------------------------------
Capital gains --
- ---------------------------------------------------------------------
Total $0.374
- ---------------------------------------------------------------------
Preferred shares Series A (600 shares)
- ---------------------------------------------------------------------
Income $560.26
- ---------------------------------------------------------------------
Capital gains --
- ---------------------------------------------------------------------
Total $560.26
- ---------------------------------------------------------------------
Share value (common shares): NAV Market price
- ---------------------------------------------------------------------
6/30/97 $11.23 $10.500
- ---------------------------------------------------------------------
12/31/97 11.61 10.313
- ---------------------------------------------------------------------
Current return (common shares): NAV Market price
- ---------------------------------------------------------------------
End of period
- ---------------------------------------------------------------------
Current dividend rate1 5.79% 6.52%
- ---------------------------------------------------------------------
Taxable equivalent2 7.97 8.98
- ---------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided
by NAV or Market price 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 investors, 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 and the net assets allocated to remarketed 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.
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.
Portfolio of investments owned
December 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
PREFERRED STOCKS (94.8%) *
NUMBER OF SHARES VALUE
<S> <C> <C>
Automobiles (8.3%)
- --------------------------------------------------------------------------------------------
184,452 Ford Motor Co. Ser. B, $2.063 dep. shs. cum. preferred (pfd.) $ 5,326,052
71,620 General Motors Corp. Ser. B, $2.281 dep. shs. cum. pfd. 1,871,073
114,178 General Motors Corp. Ser. G, $2.28 dep. shs. cum. pfd. 3,182,712
--------------
10,379,837
Banks (17.2%)
- --------------------------------------------------------------------------------------------
70,000 Bankers Trust New York Corp. Ser. Q, $1.395
Adjustable Rate Preferred (ARP) [UPSIDE DOWN DELTA] 1,732,500
50,000 Chase Manhattan Corp. Ser. L, $5.082 cum. ARP 4,925,000
42,300 Chase Manhattan Corp. Ser. C, $2.71 cum. pfd. 1,279,575
19,000 Chase Manhattan Corp. Ser. B, $2.44 cum. pfd. 520,125
70,780 Chase Manhattan Corp. Ser. M, $2.10 cum. pfd. 1,787,195
10,000 Citicorp Ser. 8-B, $8.25 cum. pfd. 978,750
13,000 Citicorp Ser. 3, $7.00 cum. ARP 1,306,500
29,800 Citicorp Ser. 2, $6.00 cum. ARP 2,980,000
13,000 Citicorp Ser. 19, $1.292 cum. ARP 321,750
110,566 Fleet Financial Group, Inc. Ser. E, $2.338 dep. shs. cum. pfd. 3,095,848
71,000 Fleet Financial Group, Inc. Ser. V, $1.813 dep. shs. cum. pfd. 1,908,125
16,500 Wells Fargo & Co. Ser. B, $2.75 cum. pfd. ARP 802,313
--------------
21,637,681
Broadcasting (1.0%)
- --------------------------------------------------------------------------------------------
49,000 Newscorp Overseas Corp. Ser. A, $2.156 pfd. 1,225,000
Chemicals (0.6%)
- --------------------------------------------------------------------------------------------
5,050 du Pont (E.I.) de Nemours & Co., Ltd. Ser. B, $4.50 cum. pfd. 421,675
6,000 du Pont (E.I.) de Nemours & Co., Ltd. Ser. A, $3.50 cum. pfd. 384,000
--------------
805,675
Combined Utilities (11.0%)
- --------------------------------------------------------------------------------------------
23,900 Baltimore Gas & Electric Co. Ser. 93, $7.125 cum. pfd. 2,679,788
40,000 Baltimore Gas & Electric Co. $6.99 cum. pfd. 4,475,000
10,000 Baltimore Gas & Electric Co. Ser. 93, $6.70 cum. pfd. 1,091,250
108,500 New York State Electric & Gas Corp. Ser. B,
1.418 cum. ARP 2,604,000
65,000 Pacific Gas & Electric Co. Ser. U, $1.76 cum. pfd. 1,787,500
6,750 Public Service Electric & Gas Co. $6.92 cum. pfd. 734,906
14,000 San Diego Gas & Electric Co. $1.763 cum. pfd. 383,250
--------------
13,755,694
Computer Software (0.5%)
- --------------------------------------------------------------------------------------------
24,000 IBM Corp. Ser. A, $1.875 dep. shs. pfd. 651,000
Electric Utilities (28.2%)
- --------------------------------------------------------------------------------------------
88,100 Alabama Power Co. Ser. 93-A, $1.318 cum. ARP 2,158,450
20,000 Appalachian Power Co. $5.92 cum. pfd. 2,007,500
50,000 Connecticut Light & Power Co. Sinking Fund Ser. 92,
$3.615 cum. pfd. 2,112,500
40,000 Detroit Edison Co. $1.938 dep. shs. cum. pfd. 1,005,000
18,000 Duke Power Co. Ser. S, $7.85 cum. pfd. 2,034,000
50,825 Duke Power Co. Ser. W, $7.00 cum. pfd. 5,622,516
5,924 Entergy Arkansas, Inc. $8.52 cum. pfd. 601,286
8,916 Entergy Gulf States, Inc. $7.56 cum. pfd. 887,142
9,000 Entergy Louisiana, Inc. $7.00 cum. pfd. 905,625
20,000 Florida Power & Light Co. Ser. S, $6.98 cum. pfd. 2,195,000
50,000 Georgia Power Co. Ser. 93, $1.443 cum. ARP 1,218,750
100,000 Georgia Power Co. Ser. 93-2, $1.325 cum. ARP 2,400,000
50,000 Long Island Lighting Co. Sinking Fund Ser. NN,
$1.95 cum. pfd. 1,256,250
20,000 Niagara Mohawk Power Corp. $2.375 cum. pfd. 522,500
15,200 Niagara Mohawk Power Corp. Ser. A, $1.625 cum. ARP 349,600
20,000 Northern Indiana Public Services Ser. A, $3.00 ARP 1,032,500
6,600 Northern States Power Co. Ser. A, $5.52 cum. ARP 661,650
5,000 Peco Energy $7.48 cum. pfd. 532,500
9,360 Puget Sound Energy, Inc. Ser. III, $2.125 cum. pfd. 248,040
67,000 San Diego Gas & Electric Co. $1.70 cum. pfd. 1,809,000
10,000 Texas Utilities Electric Co. $6.375 cum. pfd. 1,021,250
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. 659,375
20,000 Virginia Electric & Power Co. $6.98 cum. pfd. 2,200,000
--------------
35,443,304
Finance (9.9%)
- --------------------------------------------------------------------------------------------
40,000 Bear Stearns & Co. Ser. A, $2.75 cum. ARP 1,860,000
9,000 Bear Stearns & Co. Ser. B, $1.97 dep. shs. cum. pfd. 227,250
49,669 Berkley (W.R.) Corp. Ser. A, $1.844 dep. shs. cum. pfd. 1,266,560
49,500 MBNA Corp. Ser. A, $1.875 cum. pfd. 1,305,563
40,000 MBNA Corp. Ser. B, $1.573 ARP 1,040,000
166,252 Merrill Lynch & Co., Inc. Ser. A, $2.25 dep. shs. cum. pfd. 5,112,249
30,000 Morgan Stanley $3.875 dep. shs. cum. pfd. 1,657,500
--------------
12,469,122
Financial Services (1.7%)
- --------------------------------------------------------------------------------------------
38,350 Household International, Inc. Ser. 92-A, $2.063 dep. shs.
cum. pfd. 1,078,590
20,000 J.P. Morgan & Co., Inc. Ser. H, $3.313 dep. shs. cum. pfd. 1,100,000
--------------
2,178,590
Insurance (3.2%)
- --------------------------------------------------------------------------------------------
54,000 Travelers Group, Inc. $3.183 pfd. 2,781,000
26,500 Travelers Group, Inc. Ser. M, $2.932 cum. pfd. 1,295,188
--------------
4,076,188
Metals and Mining (0.5%)
- --------------------------------------------------------------------------------------------
8,450 Aluminum Co. $3.75 cum. pfd. 571,431
Oil Services (7.1%)
- --------------------------------------------------------------------------------------------
111,000 LASMO PLC ADS Ser. A, $2.50 cum. pfd.
(United Kingdom) 2,969,250
190,537 McDermott, Inc. Sinking Fund Ser. B, $2.60 cum. pfd. 5,906,647
--------------
8,875,897
Oil and Gas (4.6%)
- --------------------------------------------------------------------------------------------
105,000 El Paso Tennessee Pipeline Co. Ser. A, $4.125 cum. pfd. 5,788,125
Water Utilities (1.0%)
- --------------------------------------------------------------------------------------------
12,000 United Water Resources, Inc. Ser. B, $7.625 cum. pfd. 1,248,000
--------------
Total Preferred Stocks (cost $114,074,841) $ 119,105,544
CONVERTIBLE PREFERRED STOCKS (2.8%) * (cost $2,677,115)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------
109,270 Lehman Brothers Holding, Inc. $1.955 cv. pfd. $ 3,537,616
SHORT-TERM INVESTMENTS (3.6%) * (cost $4,531,818)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------
$4,531,000 Interest in $575,000,000 joint repurchase agreement
dated December 31, 1997 with Goldman Sachs due
January 2, 1998 with respect to various U.S. Treasury
obligations -- maturity value of $4,532,636 for an
effective yield of 6.50% $ 4,531,818
- --------------------------------------------------------------------------------------------
Total Investments (cost $121,283,774) *** $ 127,174,978
- --------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $125,668,074.
*** The aggregate identified cost on a tax basis is $121,287,233 resulting in gross unrealized
appreciation and depreciation of $7,058,871 and $1,171,126, respectively, or net unrealized
appreciation of $5,887,745.
[UPSIDE DOWN DELTA] This entity provides subcustodian services to the fund.
ADS after the name of a foreign holding 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>
<CATPION>
Statement of assets and liabilities
December 31, 1997 (Unaudited)
Assets
- -----------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value
(identified cost $121,283,774) (Note 1) $127,174,978
- -----------------------------------------------------------------------------------
Cash 10,024
- -----------------------------------------------------------------------------------
Dividends and interest receivable 906,817
- -----------------------------------------------------------------------------------
Total assets 128,091,819
Liabilities
- -----------------------------------------------------------------------------------
Distributions payable to shareholders 920,298
- -----------------------------------------------------------------------------------
Payable for securities purchased 1,189,231
- -----------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 237,557
- -----------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 19,222
- -----------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 9,568
- -----------------------------------------------------------------------------------
Payable for administrative services (Note 2) 3,487
- -----------------------------------------------------------------------------------
Other accrued expenses 44,382
- -----------------------------------------------------------------------------------
Total liabilities 2,423,745
- -----------------------------------------------------------------------------------
Net assets $125,668,074
Represented by
- -----------------------------------------------------------------------------------
Paid-in capital -- common shares (Unlimited shares
authorized; 10,821,255 shares outstanding) (Notes 1 and 4) $122,164,096
- -----------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (223,794)
- -----------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (2,163,432)
- -----------------------------------------------------------------------------------
Net unrealized appreciation of investments 5,891,204
- -----------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $125,668,074
Computation of net asset value
- -----------------------------------------------------------------------------------
Net asset value per share ($125,668,074 divided by 10,821,255 shares) $11.61
- -----------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended December 31, 1997 (Unaudited)
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------
Dividends (net of foreign tax of $19,256) $4,436,694
- -----------------------------------------------------------------------------------
Interest 95,543
- -----------------------------------------------------------------------------------
Total investment income 4,532,237
- -----------------------------------------------------------------------------------
Expenses:
Compensation of Manager (Note 2) 498,145
- -----------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 78,433
- -----------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 6,201
- -----------------------------------------------------------------------------------
Administrative services (Note 2) 5,136
- -----------------------------------------------------------------------------------
Reports to shareholders 11,451
- -----------------------------------------------------------------------------------
Auditing 15,164
- -----------------------------------------------------------------------------------
Legal 3,848
- -----------------------------------------------------------------------------------
Postage 39,724
- -----------------------------------------------------------------------------------
Exchange listing fees 10,108
- -----------------------------------------------------------------------------------
Other 3,544
- -----------------------------------------------------------------------------------
Total expenses 671,754
- -----------------------------------------------------------------------------------
Expense reduction (Note 2) (18,963)
- -----------------------------------------------------------------------------------
Net expenses 652,791
- -----------------------------------------------------------------------------------
Net investment income 3,879,446
- -----------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 2,602,391
- -----------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 1,812,401
- -----------------------------------------------------------------------------------
Net gain on investments 4,414,792
- -----------------------------------------------------------------------------------
Net increase in net assets resulting from operations $8,294,238
- -----------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
December 31 June 30
1997* 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- --------------------------------------------------------------------------------------------------------
Operations:
- --------------------------------------------------------------------------------------------------------
Net investment income $3,879,446 $11,368,174
- --------------------------------------------------------------------------------------------------------
Net realized gain on investments 2,602,391 614,252
- --------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 1,812,401 6,446,464
- --------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 8,294,238 18,428,890
Distributions to preferred shareholders:
- --------------------------------------------------------------------------------------------------------
From net investment income (336,157) (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) 7,958,081 16,133,488
- --------------------------------------------------------------------------------------------------------
Distributions to common shareholders:
- --------------------------------------------------------------------------------------------------------
From net investment income (4,047,433) (8,440,000)
- --------------------------------------------------------------------------------------------------------
Decrease from capital shares transaction (Note 4)
Auction preferred shares (60,000,000) --
- --------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (56,089,352) 7,693,488
Net assets
- --------------------------------------------------------------------------------------------------------
Beginning of period 181,757,426 174,063,938
- --------------------------------------------------------------------------------------------------------
End of period (including distributions in excess of net
investment income and undistributed net investment
income of $223,794 and $280,350, respectively) $125,668,074 $181,757,426
- --------------------------------------------------------------------------------------------------------
Number of fund shares
- --------------------------------------------------------------------------------------------------------
Common shares outstanding at beginning and end of period 10,821,255 10,821,255
- --------------------------------------------------------------------------------------------------------
Auction preferred shares outstanding at beginning of period 600 600
- --------------------------------------------------------------------------------------------------------
Auction preferred shares outstanding at end of period -- 600
- --------------------------------------------------------------------------------------------------------
*Unaudited
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a common share outstanding throughout the period)
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share December 31
operating performance (Unaudited) Year ended June 30
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year
(common shares) $11.23 $10.54 $10.57 $10.84 $12.39 $11.38
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .35 1.05 .80 .78 1.13 1.35
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .41 .65 .03 .01 (1.13) .97
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .76 1.70 .83 .79 -- 2.32
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income
- ------------------------------------------------------------------------------------------------------------------------------------
To preferred shareholders (.01) (.23) (.07) (.01) (.16) (.21)
- ------------------------------------------------------------------------------------------------------------------------------------
To common shareholders (.37) (.78) (.72) (.78) (1.04) (1.08)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gains
- ------------------------------------------------------------------------------------------------------------------------------------
To preferred shareholders -- -- -- (.06) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
To common shareholders -- -- -- (.24) (.38) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.38) (1.01) (.79) (1.09) (1.58) (1.29)
- ------------------------------------------------------------------------------------------------------------------------------------
Auction preferred
share offering cost -- -- (.07) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Change in cumulative
undeclared dividends
on auction preferred shares -- -- -- .03 .03 (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year
(common shares) $11.61 $11.23 $10.54 $10.57 $10.84 $12.39
- ------------------------------------------------------------------------------------------------------------------------------------
Market value, end of year
(common shares) $10.313 $10.500 $8.875 $9.250 $9.750 $11.875
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Ratios and supplemental data
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Total investment return
at market value
(common shares) (%)(a) 1.80* 27.88 3.51 5.82 (6.78) 8.27
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Net assets, end of year
(total fund) (in thousands) $125,668 $181,757 $174,064 $114,357 $142,629 $208,076
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Ratio of expenses to
average net assets (%)(b)(c) .55* 1.51 1.23 1.07 1.42 1.70
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Ratio of net investment income
to average net assets (%)(b) 3.05* 7.57 6.88 7.39 8.06 9.65
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Portfolio turnover (%) 12.23* 19.27 35.13 27.39 73.63 166.44
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Average commission
rate paid (d) $.0500 $.0500
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* Not annualized.
(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.
(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
December 31, 1997 (Unaudited)
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 and the liquidation preference 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. 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. 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, 1997, the fund had a capital loss carryover of
approximately $4,762,000 available to offset future net capital gain,
if any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration Date
------------------ ------------------
$ 230,000 June 30, 2003
4,532,000 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. 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.
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% of any amount over
$1.5 billion.
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 wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
For the six months ended December 31, 1997, fund expenses were reduced
by $18,963 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 $590
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 six months ended December 31, 1997, purchases and sales of
investment securities other than short-term investments aggregated
$15,844,646 and $61,963,779, 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 December 31, 1997, no such
restrictions have been placed on the fund.
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
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
Brett C. Browchuk
Vice President
Thomas Reilly
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 for
up-to-date information about the fund's NAV.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
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Bulk Rate
U.S. Postage
PAID
Putnam
Investments
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