Putnam
Dividend
Income
Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
6-30-99
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The preferred stocks in which Putnam Dividend Income Fund invests have
traditionally been the province of banks, heavy industry, and public
utilities. In today's challenging market conditions, however, companies in
other industries have also begun to raise capital by issuing preferreds.
The result has been a welcome inflow of new securities to a market that
has seen shrinking issuance in recent years.
The new source of supply has provided both opportunity and challenge for
Fund Manager Jeanne Mockard. Opportunity came during the fiscal year ended
June 30, 1999, through an increasing number of issues from the oil and gas
industry. Based on Jeanne's extensive experience, backed by Putnam's
equity research staff, she identified potential opportunities and then
acted upon them.
In the following report, Jeanne discusses this and other strategies she
employed during fiscal 1999 and then comments on prospects for the year
ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
August 18, 1999
Report from the Fund Manager
Jeanne L. Mockard
During Putnam Dividend Income Fund's fiscal year, which ended June 30,
1999, the world's securities markets delivered widely divergent results in
a generally volatile environment. The preferred securities your fund
invests in echoed, to some extent, the movements of stock and bond markets
during the year.
Because they are fixed-income securities, preferred stocks are generally
more sensitive to changing interest rates than to equity prices. Since
your fund had a relatively long duration, it benefited from the fall's
bond price rally. But stock market trends also affect the performance of
preferred securities, since prices of preferreds tend to reflect the
performance of the issuing companies' underlying common stock. During the
period, the stock market plunged and then made a rapid recovery. Three
separate cuts by the Federal Reserve Board reduced short-term interest
rates early in the period. However, the Fed shifted toward a tightening
stance toward the end of your fund's fiscal year. This challenging
environment for preferred securities was reflected in your fund's
performance for the 12 months ended June 30, 1999.
Total return for 12 months ended 6/30/99
Net asset value Market price
- --------------------------------------------------------------------
0.34% -2.70%
- --------------------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods begins on page 6.
* VARIOUS TYPES OF PREFERREDS OFFER OPPORTUNITY
Your fund has the flexibility to change its weighting among different
types of preferred stocks. Perpetual preferreds offer the best opportunity
when interest rates are trending down because they offer a fixed rate of
return with no maturity date. As interest rates rise, adjustable-rate
preferreds (ARPs) often offer a more defensive strategy. These tend to be
relatively stable in price because the rates they pay are adjusted at
specified intervals (usually six months). A third type, sinking-fund
preferred stocks, or sinkers, also have fixed rates, but they are retired
on a predetermined schedule. As such, they behave somewhat like
intermediate-term bonds and are appropriate when pursuing a neutral
strategy. As the fund began its fiscal year, our portfolio strategy
focused on protecting the valuable perpetual preferred positions while
holding a portion of adjustable-rate preferreds to help provide some
cushion against rising interest rates.
[GRAPHIC OMITTED: horizontal bar chart COMPARATIVE PORTFOLIO COMPOSITION]
COMPARATIVE PORTFOLIO COMPOSITION*
6/30/98 6/30/99
Perpetual
preferreds 74.9% 82.2%
Adjustable-rate
preferreds 15.2% 8.9%
Sinking-fund
preferreds 5.7% 4.5%
Convertible
preferreds 3.0% 2.6%
Short-term
securities 1.2% 1.1%
Footnote reads:
*Based on net assets as of 6/30/98 and 6/30/99. Holdings will vary over time.
* CAREFUL MONITORING OF PROSPECTIVE CALLS HELPS PROTECT INCOME STREAM
Companies typically issue perpetual-rate preferreds when they wish to
raise capital without increasing debt levels or issuing new common equity.
If conditions improve, companies are likely to call in their preferreds as
soon as their terms allow.
Consequently, we continually monitor holdings that may be called within
the next several months and search for new buying opportunities. Our goal
is to stagger trades as each call date approaches, selling the securities
before they are called and redeploying assets in securities with more
distant call dates to avoid interrupting the fund's income stream. During
the fiscal year, we eliminated the fund's holdings in Boise Cascade and
reduced the fund's holdings in Ford Motor Company in anticipation of
calls. In such cases, we often reinvested proceeds in other preferreds
issued by the same company, but we also looked for attractive new issues.
* NEW INDUSTRIES PROVIDE NEW OPPORTUNITIES
Historically companies in the financial and public utilities sectors have
been the primary issuers of preferred securities, and these kinds of
companies continue to make up a large percentage of the fund's portfolio.
More recently, companies in other industries have also begun to issue
preferreds to raise capital under challenging conditions. For example, IBM
issued preferred stock when it was experiencing difficulties, resulting in
a rewarding opportunity. This trend has also spread to the oil and gas
industries.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Merrill Lynch & Co., Inc. Series A, $2.25 deposit-shares
cumulative preferred
Financial 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
General Motors Corp. Series G,
$2.28 preferred
Automobiles
Baltimore Gas & Electric Co.
Series 95, $6.99 cumulative preferred
Combined utilities
Chase Manhattan Corp. Series L, $4.50 cumulative
adjustable-rate preferred
Banks
Peco Energy
$7.48 cumulative preferred
Electric utilities
Lehman Brothers Holding, Inc.
$5.00 convertible preferred
Financial services
Alabama Power Co.
$1.30 cumulative preferred
Electric utilities
Fleet Financial Group, Inc.
Series E, $2.338 deposit-shares
cumulative preferred
Banks
Footnote reads:
These holdings represent 34.4% of the fund's net assets as of 6/30/99.
Portfolio holdings will vary over time.
Last winter's unseasonably warm weather in the Northeast and Midwest
helped to swell oil and gas supplies early in the period. In addition,
financial crises overseas dampened worldwide demand, especially in
formerly fast-growing Asian markets. As a result, several solid,
well-managed energy companies issued preferred stock -- a welcome change,
since new preferred stock issuance has slowed in recent years. We tapped
into Putnam's expertise in this sector to take advantage of opportunities
in attractively priced preferred stocks of oil and gas companies.
During the period, we also took advantage of attractive utility issues.
One example is Baltimore Gas & Electric Company, a member of Constellation
Energy Group. Baltimore Gas & Electric provides electricity to more than
1.1 million customers in Baltimore and central Maryland. It delivers
natural gas to more than 565,000 Maryland customers and develops and
operates generation projects in the United States and Latin America. The
company has recently benefited from favorable deregulation legislation and
operates in a territory that we believe offers substantial growth rates.
Although this 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.
"Putnam's combination of knowledge and buying power is invaluable in helping
us identify and capture opportunities when companies come to the preferred
markets for capital."
- -- Jeanne L. Mockard, manager, Putnam Dividend Income Fund
* SHAREHOLDERS WELL SERVED BY PUTNAM'S SIZE AND EXPERTISE
Putnam Investments has an edge in the preferred markets because we are one
of the biggest players and have access to extensive research. This
combination of knowledge and buying power is invaluable in helping us
identify and capture opportunities when companies come to the preferred
markets for capital.
Our expertise helped us to meet your fund's 100% goal of
dividends-received-deduction (DRD) status for federal income tax purposes.
Other companies operate on the promise that in this limited market, they
will do the best they can to seek qualified dividends. We are able to hold
paper for the required period (or longer), and most of the holdings are
domestic. Our aim is that the income the fund receives from the few
foreign securities in the portfolio will not exceed our expenses so that
all the dividend income is qualified.
* FUND REMAINS UNLEVERAGED
During the fund's previous fiscal year, Putnam management decided to
eliminate the fund's leverage. 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.
However, in an environment in which short-term interest rates are moving
higher, leverage can work against the fund, as the level of income paid to
preferred shareholders increases. Given the current interest-rate
environment, we maintained the fund's de-leveraged status throughout the
period and currently have no plans to change it over the near term.
* POSITIVE OUTLOOK FOR PREFERRED SECURITIES
Conditions in the preferred markets have improved over the past several
months. There has been a slowdown in the pace of new issues, while demand
for existing preferreds increased.
Recently we have seen improvement in the bond market, and we believe the
prospects are brighter for many of the fund's holdings. Moving ahead, 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.
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 6/30/99, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
This section provides information about your fund's performance, which should
always be considered in light of its 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 6/30/99
Merrill Lynch
Perpetual
Market Preferred Consumer
NAV price Index price index
- --------------------------------------------------------------------------
1 year 0.34% -2.70% 5.18% 1.96%
- --------------------------------------------------------------------------
5 years 53.06 47.59 52.27 12.30
Annual average 8.89 8.10 8.78 2.35
- --------------------------------------------------------------------------
Life of fund 150.24 96.72 140.71 32.96
(since 9/28/89)
Annual average 9.86 7.19 9.43 2.97
- --------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. 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 6/30/99
- ----------------------------------------------------------------------------
Distributions (common shares)
- ----------------------------------------------------------------------------
Number 12
- ----------------------------------------------------------------------------
Income $0.681
- ----------------------------------------------------------------------------
Capital gains --
- ----------------------------------------------------------------------------
Total $0.681
- ----------------------------------------------------------------------------
Share value (common shares) NAV Market price
- ----------------------------------------------------------------------------
6/30/98 $11.88 $10.625
- ----------------------------------------------------------------------------
6/30/99 11.23 9.688
- ----------------------------------------------------------------------------
Current return (end of period)
- ----------------------------------------------------------------------------
Current dividend rate1 5.98% 6.94%
- ----------------------------------------------------------------------------
Taxable equivalent2 6.68 7.75
- ----------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or market price at end of period.
2 Assumes a corporation taxed at the 35% federal tax rate and that 100% of
the fund's distributions qualify for the 70% corporate dividends-received
deduction for 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.
A guide to the financial statements
These sections of the report, preceded by the Report of independent
accountants, constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values as of
the last day of the reporting period. Holdings are organized by asset type and
industry sector, country, or state to show areas of concentration and
diversification.
Statement of assets and liabilities shows how the fund's net assets and share
price is determined. All investment and non-investment assets are added
together. Any unpaid expenses and other liabilities are subtracted from this
total. The result is divided by the number of shares to determine the net
asset value per share, which is calculated separately for each class of
shares. (For funds with preferred shares, the amount subtracted from total
assets includes the net assets allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss for the
reporting period. This is determined by adding up all the fund's earnings --
from dividends and interest income -- and subtracting its operating expenses.
This statement also lists any net gain or loss the fund realized on the sales
of its holdings and -- for holdings that remain in the portfolio -- any change
in unrealized gains or losses over the period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number of the
fund's shares. It lists distributions and their sources (net investment income
or realized capital gains) over the current reporting period and the most
recent fiscal year-end. The distributions listed here may not match the
sources listed in the Statement of operations because the distributions are
determined on a tax basis and may be paid in a different period from the one
in which they were earned.
Financial highlights provide an overview of the fund's investment results,
per-share distributions, expense ratios, net investment income ratios and
portfolio turnover in one summary table, reflecting the five most recent
reporting periods. In a semiannual report, the highlight table also includes
the current reporting period. For open-ended funds, a separate table is
provided for each share class.
Report of independent accountants
For the fiscal year ended June 30, 1999
To the Trustees and Shareholders of
Putnam Dividend Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio, 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, 1999, 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, 1999 by correspondence with the custodian, provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
August 11, 1999
<TABLE>
<CAPTION>
The fund's portfolio
June 30, 1999
PREFERRED STOCKS (95.6%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
Automobiles (5.2%)
- --------------------------------------------------------------------------------------------------------------------------
67,600 Ford Motor Co. Ser. B, $2.063 dep. shs. cum. preferred (pfd) $ 1,909,700
159,178 General Motors Corp. Ser. G, $2.28 pfd. 4,456,984
--------------
6,366,684
Banks (8.9%)
- --------------------------------------------------------------------------------------------------------------------------
45,600 Bankers Trust New York Corp. Ser. Q, $1.269 cum. Adjustable
Rate Preferred (ARP) (CUS) 1,111,500
9,800 Bankers Trust New York Corp. Ser. R, $1.269 cum. pfd. (CUS) 237,650
40,000 Chase Manhattan Corp. Ser. L, $4.50 cum. ARP 3,840,000
62,300 Chase Manhattan Corp. Ser. C, $2.71 cum. pfd. 1,791,125
116,566 Fleet Financial Group, Inc. Ser. E, $2.338 dep. shs. cum. pfd. 3,059,858
16,500 Wells Fargo Co. Ser. B, $6.954 cum. ARP 827,063
--------------
10,867,196
Broadcasting (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
26,000 Newscorp Overseas Corp. Ser. A, $2.156 cum. pfd. 627,250
Chemicals (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
14,250 du Pont (E.I.) de Nemours & Co., Ltd. Ser. B, $4.50 cum. pfd. 1,104,375
6,800 du Pont (E.I.) de Nemours & Co., Ltd. Ser. A, $3.50 cum. pfd. 500,650
7,500 Praxair, Inc. Ser. B, $6.75 cum. pfd. 795,000
--------------
2,400,025
Combined Utilities (15.1%)
- --------------------------------------------------------------------------------------------------------------------------
23,900 Baltimore Gas & Electric Co. Ser. 93, $7.125 cum. pfd. 2,515,475
40,000 Baltimore Gas & Electric Co. Ser. 95, $6.99 cum. pfd. 4,310,000
20,000 Florida Power & Light Co. Ser. S, $6.98 cum. pfd. 2,142,500
13,823 Florida Power & Light Co. Ser. U, $6.75 cum. pfd. 1,472,150
3,000 Monongahela Power Co. Ser. L, $7.73 cum. pfd. 334,500
72,700 Pacific Gas & Electric Co. Ser. U, $1.76 cum. pfd. 1,971,988
20,000 Pacific Gas & Electric Co. $1.643 cum. pfd. 527,500
13,300 Pacificorp Sinking Fund $7.48 cum. pfd. 1,463,000
7,500 Pacificorp $7.70 cum. pfd. 795,000
6,750 Public Service Electric & Gas Co. $6.92 cum. pfd. 733,219
14,000 San Diego Gas & Electric Co. $1.763 cum. pfd. 358,750
67,000 San Diego Gas & Electric Co. $1.70 cum. pfd. 1,716,875
--------------
18,340,957
Computer Software (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
36,011 IBM Corp. Ser. A, $1.875 dep. shs. pfd. 976,798
Consumer Services (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Western Resources, Inc. $4.25 cum.pfd. 415,000
Electric Utilities (29.9%)
- --------------------------------------------------------------------------------------------------------------------------
130,800 Alabama Power Co. $1.30 cum. pfd. 3,090,150
20,000 Appalachian Power Co. $5.92 cum. pfd. 2,007,500
10,000 Baltimore Gas & Electric Co. Ser. 93, $6.70 pfd. 1,042,500
50,000 Connecticut Light & Power sinking-fund Ser. 92, $3.62 pfd. 2,281,250
18,000 Duke Power Co. Ser. S, $7.85 cum. pfd. 1,935,000
50,825 Duke Power Co. Ser. W, $7.00 cum. pfd. 5,336,625
4,715 Entergy Arkansas, Inc. $8.52 cum. pfd. 469,143
8,916 Entergy Gulf States, Inc. $7.56 cum. pfd. 898,287
2,900 Entergy Mississippi, Inc. $4.92 cum. pfd. 254,475
5,000 Indianapolis Power & Light $5.65 cum. pfd. 510,625
3,000 Kentucky Utilities Co. $6.53 cum. pfd. 319,875
20,000 Niagara Mohawk Power Corp. $2.375 cum. pfd. 505,000
15,200 Niagara Mohawk Power Corp. Ser. A, $1.625 cum. ARP 378,100
20,000 Northern Indiana Public Services Ser. A, $3.00 cum. ARP 962,560
29,150 Peco Energy $7.48 cum. pfd. 3,264,800
15,000 Portland General Electric Sinking Fund $7.75 cum. pfd. 1,738,125
10,000 South Carolina Electric & Gas Co. $6.52 cum. pfd. 1,076,250
2,400 Southern California Edison Co. $6.45 cum. pfd. 237,000
25,000 Southern California Edison Co. $6.05 cum. pfd. 2,493,747
32,875 Southern California Edison Co. $1.20 cum. pfd. 721,195
10,000 Texas Utilities Electric Co. $7.98 cum. pfd. 1,118,750
10,000 Texas Utilities Electric Co. $6.375 cum. pfd. 990,000
75,580 Texas Utilities Electric Co. Ser. A, $1.875 dep. shs. cum. pfd. 1,917,843
25,000 Texas Utilities Electric Co. Ser. B, $1.805 dep. shs. cum. pfd. 612,500
20,000 Virginia Electric & Power Co. $6.98 cum. pfd. 2,165,000
--------------
36,326,300
Financial Services (21.5%)
- --------------------------------------------------------------------------------------------------------------------------
20,900 Bear Stearns Companies Inc. Ser. E, $3.075 cum. pfd. 1,013,650
17,000 Bear Stearns Companies Inc. Ser. F, $2.86 cum. pfd. 762,875
14,000 Bear Stearns Companies Inc. Ser. A, $2.75 cum. ARP 677,250
31,200 Bear Stearns Companies Inc. Ser. G, $2.745 cum. pfd. 1,353,300
54,000 Citigroup, Inc. Ser. R, $3.182 pfd. 2,747,250
5,345 Citigroup, Inc. Ser. M, $2.93 cum. pfd. 258,564
35,000 Citigroup, Inc. Ser. K, $2.10 cum. pfd. 927,500
63,850 Household International, Inc. Ser. 92-A, $2.063
dep. shs. cum. pfd. 1,739,913
52,000 J.P. Morgan & Co. Inc. Ser. H, $3.313 dep. shs. cum. pfd. 2,697,500
5,000 Lehman Brothers Holding, Inc. Ser. C, $2.97 pfd. 221,250
43,000 Lehman Brothers Holding, Inc. Ser. D, $2.835 pfd. 1,800,625
36,400 MBNA Corp. Ser. A, $1.875 cum. pfd. 900,900
11,000 MBNA Corp. Ser. B, $1.745 ARP 272,250
188,639 Merrill Lynch & Co., Inc. Ser. A, $2.25 dep. shs. cum. pfd. 5,706,330
30,000 Morgan (J.P.) & Co., Inc. Ser. A, $5.00 cum. ARP 2,722,500
45,000 Morgan Stanley $3.875 dep. shs. cum. pfd. 2,373,750
--------------
26,175,407
Gas Utilities (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
59,000 Boston Gas Ser. A, $1.61 pfd. 1,593,000
Metals and Mining (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
8,450 Alcoa Inc. $3.75 cum. pfd. 636,919
Oil and Gas (9.5%)
- --------------------------------------------------------------------------------------------------------------------------
20,000 Anadarko Petroleum Corp. $5.46 dep. shs. pfd. 1,810,000
10,000 Apache Corp. Ser. B, $5.68 cum. pfd. 925,000
107,500 El Paso Tennessee Pipeline Co. Ser. A, $4.125 cum. pfd. 5,643,750
111,000 LASMO PLC ADS Ser. A, $2.50 cum. pfd. (United Kingdom) 2,650,125
16,500 Washington Natural Gas Ser. II, $1.862 cum. pfd. 433,125
--------------
11,462,000
--------------
Total Preferred Stocks (cost $116,954,626) $ 116,187,536
CONVERTIBLE PREFERRED STOCKS (2.6%) (a) (cost $2,677,115)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
109,270 Lehman Brothers Holding, Inc. $5.00 cv. pfd. $ 3,155,171
SHORT-TERM INVESTMENTS (1.1%) (a) (cost $ 1,280,000)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$1,280,000 Interest in $402,952,000 joint repurchase agreement
dated June 30, 1999 with Merrill Lynch, Pierce,
Fenner & Smith, Inc. due July 1, 1999 with respect
to various U.S. Treasury obligations -- maturity
value of $1,280,167 for an effective yield of 4.70% $ 1,280,000
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $120,911,741) (b) $ 120,622,707
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $121,520,559.
(b) The aggregate identified cost on a tax basis is $120,919,284, resulting in gross unrealized appreciation and
depreciation of $2,990,193 and $3,286,770, respectively, or net unrealized depreciation of $296,577.
(CUS) This entity provides subcustodian services to the fund.
ADS after the name of a foreign holding stands for American Depositary 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, 1999
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $120,911,741) (Note 1) $120,622,707
- -----------------------------------------------------------------------------------------------
Cash 422
- -----------------------------------------------------------------------------------------------
Dividends and interest receivable 751,552
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 1,018,200
- -----------------------------------------------------------------------------------------------
Total assets 122,392,881
Liabilities
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 606,805
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 229,575
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 17,429
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 13,126
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,695
- -----------------------------------------------------------------------------------------------
Other accrued expenses 3,692
- -----------------------------------------------------------------------------------------------
Total liabilities 872,322
- -----------------------------------------------------------------------------------------------
Net assets $121,520,559
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital -- common shares (Unlimited shares authorized;
10,824,907 shares outstanding) (Note 1) $122,206,532
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (470,255)
- -----------------------------------------------------------------------------------------------
Accumulated net realized gain on investments (Note 1) 73,316
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (289,034)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $121,520,559
Computation of net asset value
- -----------------------------------------------------------------------------------------------
Net asset value per share ($121,520,559 divided by 10,824,907 shares) $11.23
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended June 30, 1999
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Dividends (net of foreign tax $20,813) $8,320,960
- -----------------------------------------------------------------------------------------------
Interest 66,344
- -----------------------------------------------------------------------------------------------
Total investment income 8,387,304
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 938,608
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 156,529
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 12,937
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,613
- -----------------------------------------------------------------------------------------------
Reports to shareholders 5,680
- -----------------------------------------------------------------------------------------------
Registration fees 75
- -----------------------------------------------------------------------------------------------
Auditing 26,154
- -----------------------------------------------------------------------------------------------
Postage 3,693
- -----------------------------------------------------------------------------------------------
Exchange listing fees 24,248
- -----------------------------------------------------------------------------------------------
Other 15,339
- -----------------------------------------------------------------------------------------------
Total expenses 1,189,876
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (7,650)
- -----------------------------------------------------------------------------------------------
Net expenses 1,182,226
- -----------------------------------------------------------------------------------------------
Net investment income 7,205,078
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 733,749
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the year (7,688,280)
- -----------------------------------------------------------------------------------------------
Net loss on investments (6,954,531)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 250,547
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended June 30
-------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 7,205,078 $ 7,437,064
- ---------------------------------------------------------------------------------------------------------------
Net realized gain on investments 733,749 4,105,390
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments (7,688,280) 3,320,443
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 250,547 14,862,897
Distributions to preferred shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income -- (336,444)
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations
applicable to common shareholders (excluding
cumulative undeclared dividends on remarketed
preferred shares of $-- and $-- respectively 250,547 14,526,453
- ---------------------------------------------------------------------------------------------------------------
Distributions to common shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income (7,373,033) (7,683,270)
- ---------------------------------------------------------------------------------------------------------------
Issuance of common shares with
reinvestment of distributions 42,436 --
- ---------------------------------------------------------------------------------------------------------------
Redemption of auction preferred shares (Note 4) -- (60,000,000)
- ---------------------------------------------------------------------------------------------------------------
Total decrease in net assets (7,080,050) (53,156,817)
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 128,600,609 181,757,426
- ---------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of
net investment income of $470,255 and
$302,300, respectively) $121,520,559 $128,600,609
- ---------------------------------------------------------------------------------------------------------------
Number of fund shares
- ---------------------------------------------------------------------------------------------------------------
Common shares outstanding at beginning of year 10,821,255 10,821,255
- ---------------------------------------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions 3,652 --
- ---------------------------------------------------------------------------------------------------------------
Common shares outstanding at end of year 10,824,907 10,821,255
- ---------------------------------------------------------------------------------------------------------------
Auction preferred shares outstanding at
beginning of year -- 600
- ---------------------------------------------------------------------------------------------------------------
Auction preferred shares outstanding
at end of year -- --
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a common share outstanding throughout the period)
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended June 30
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year (common shares) $11.88 $11.23 $10.54 $10.57 $10.84
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .67 .69 1.05 .80 .78
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.64) .68 .65 .03 .01
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .03 1.37 1.70 .83 .79
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net investment income
- ------------------------------------------------------------------------------------------------------------------------------------
To preferred shareholders -- (.01) (.23) (.07) (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
To common shareholders (.68) (.71) (.78) (.72) (.78)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gains
- ------------------------------------------------------------------------------------------------------------------------------------
To preferred shareholders -- -- -- -- (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
To common shareholders -- -- -- -- (.24)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.68) (.72) (1.01) (.79) (1.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Auction preferred
share offering cost -- -- -- (.07) --
- ------------------------------------------------------------------------------------------------------------------------------------
Change in cumulative
undeclared dividends
on auction preferred shares -- -- -- -- .03
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year
(common shares) $11.23 $11.88 $11.23 $10.54 $10.57
- ------------------------------------------------------------------------------------------------------------------------------------
Market value, end of year
(common shares) $9.688 $10.625 $10.500 $8.875 $9.250
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
market value
(common shares) (%)(a) (2.70) 8.22 27.88 3.51 5.82
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year
(total fund) (in thousands) $121,521 $128,601 $181,757 $174,064 $114,357
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(c) .95 1.02 1.51 1.23 1.07
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(b) 5.76 5.77 7.57 6.88 7.39
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 28.40 30.63 19.27 35.13 27.39
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Total 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).
</TABLE>
Notes to financial statements
June 30, 1999
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. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. 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, 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.
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 temporary and
permanent differences of losses on wash sale transactions and 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,
1999, 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, 1999, fund expenses were reduced by $7,650
under expense offset arrangements with PFTC and brokerage service
arrangements. 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 $550 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
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, 1999, purchases and sales of investment
securities other than short-term investments aggregated $35,347,977 and
$36,145,591, 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).
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.
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Fund
hereby designates $80,830 as capital gain, for its taxable year ended June
30, 1999.
The Form 1099 you receive in January 2000 will show the tax status of all
distributions paid to your account in calendar 1999.
Fund information
WEB SITE
www.putnaminv.com
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
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
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
Stephen Oristaglio
Vice President
Thomas V. Reilly
Vice President
Anthony I. Kreisel
Vice President
Jeanne L. Mockard
Vice President and Fund Manager
Richard A. Monaghan
Vice President
John R. Verani
Vice President
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or visit
our Web site (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
- ---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminv.com
53939-056 8/99
