Putnam
Dividend
Income
Fund
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
12-31-98
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
In a volatile six months for the world's financial markets, Putnam
Dividend Income Fund benefited from its defensive positioning. Although
preferred stocks are technically equity securities, they tend to perform
in line with the bond market, which was considerably calmer than the stock
market during the first half of your fund's fiscal year. In addition, your
fund's management team was able to further diversify the portfolio with
new investments in the oil and natural gas sector. For the six months
ended December 31, 1998, your fund provided a total return of 0.12% at net
asset value and 4.40% at market price. For complete performance
information, please refer to the summary that begins on page 6.
Although 1998 ended on a bright note for the U.S. stock market, it was one
of the most challenging years in more than a decade. Early in the period,
resurgent political and financial instability in many of the world's
developing countries had a dramatic effect on markets around the globe. On
July 17, the Dow Jones Industrial Average reached a record-breaking high,
only to plummet more than 512 points the following month, wiping out the
entire year's gains. The third quarter of 1998 was the Dow's worst quarter
in eight years. In the fourth quarter, the stock market's rally was almost
as dramatic as its late-summer plunge. In a startling turnaround, the U.S.
equity market posted double-digit returns for its fourth consecutive year.
The bond market also had its share of turmoil but delivered healthy
returns for the calendar year. In an interesting twist, more conservative
bond investments outperformed riskier ones for the first time since 1990.
In conjunction with the stock market selloff, jittery investors fled to
the relative safety of U.S. government securities, resulting in a dramatic
rally for U.S. Treasuries. During the fall, the Federal Reserve Board cut
interest rates on three separate occasions for a total reduction of three
quarters of a percentage point. In this environment, your fund's perpetual
and sinking-fund preferred stocks proved particularly beneficial.
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.
* NEW ISSUES BRING DIVERSIFICATION OPPORTUNITY
For quite some time, companies in the financial, industrial, and public
utilities sectors have been the primary issuers of preferred securities.
Consequently, holdings in these three sectors historically have made up a
large percentage of the fund's portfolio. During the period, a new
preferred stock sector emerged as several companies in the energy industry
issued this type of stock to raise capital. Jeanne Mockard, your fund's
lead manager, took advantage of this opportunity to invest in attractively
priced preferred stocks of oil and gas companies. An added benefit has
been Jeanne's expertise in this sector; she is also manager of Putnam
Global Natural Resources Fund.
[GRAPHIC OMITTED: double horizontal bar chart COMPARATIVE PORTFOLIO
COMPOSITION]
COMPARATIVE PORTFOLIO COMPOSITION*
6/30/98 12/31/98
Perpetual preferreds 74.9% 81.4%
Adjustable-rate preferreds 15.2% 10.2%
Sinking-fund preferreds 5.7% 4.7%
Convertible preferreds 3.0% 2.6%
Footnote reads:
*Based on net assets as of 6/30/98 and 12/31/98. Holdings will vary over
time.
The oil and gas industry has faced tough times recently, with 1998 being
one of its most challenging since 1986. Unseasonably warm weather in the
Northeast and Midwest of the United States has swelled oil and gas
supplies and severely hurt prices. In addition, financial crises overseas
have decreased worldwide demand, especially in formerly fast-growing Asian
markets. As a result, preferred stock became available from a number of
solid, well-managed energy companies -- a welcome change, as new issuance
elsewhere has slowed considerably in recent years.
One addition to the portfolio is Anadarko Petroleum Corp., one of the
world's largest independent oil and gas companies. As with other companies
in this industry, its recent weak financial performance is a reflection of
the worldwide slump in prices and demand. However, Anadarko is a strong,
well-managed company that is expected to be well positioned when the
industry recovers. Another new holding with strong long-term potential is
Apache Corporation. Although these holdings were 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.
* ACTIVE MANAGEMENT OF CALLS CONTINUES
A continuing challenge during the period was managing the impact of calls
on the portfolio. Declining interest rates often lead issuers to call in
or retire preferred stocks that carry dividend rates above prevailing
interest rates. In order to avoid a forced redemption of a number of
perpetual preferred holdings at once, Jeanne attempts to manage the impact
of calls on the portfolio by trading securities in a staggered fashion as
they approach their first call dates. During the period, as a number of
utility holdings were called away, Jeanne was able to shift into new
energy holdings.
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. At the close of the
current fiscal period, the fund remained deleveraged, and there were no
plans to change it in the near term.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
El Paso Tennessee Pipeline Co. Series A, $4.125 cumulative preferred
Oil and gas
Merrill Lynch & Co., Inc. Series A, $2.25 deposit-shares
cumulative preferred
Financial services
Duke Power Co. Series W, $7.00 cumulative preferred
Electric utilities
Baltimore Gas & Electric Co. Series 95, $6.99 cumulative preferred
Combined utilities
General Motors Corp. Series G $2.275 preferred
Automobiles
IBM Corp. Series A, $1.875 deposit-shares preferred
Computer software
Chase Manhattan Corp. Series L, $4.50 cumulative
adjustable-rate preferred
Banks
Lehman Brothers Holdings, Inc. Series E, $5.00 convertible preferred
Financial services
Fleet Financial Group, Inc. Series E, $2.338 deposit-shares
cumulative preferred
Banks
Citigroup, Inc. Series R $3.183 preferred
Financial services
Footnote reads:
These holdings represent 35.2% of the fund's net assets as of 12/31/98.
Portfolio holdings will vary over time.
As we enter the second half of the fund's fiscal year, Jeanne remains
optimistic about the current market environment, the positioning of the
portfolio, and the long-term potential of the fund's newest holdings.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
February 17, 1999
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 12/31/98, 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 12/31/98
Merrill Lynch
Perpetual
Market Preferred Consumer
NAV price Index Price Index
- -----------------------------------------------------------------------
6 months 0.12% 4.40% 3.63% 0.74%
- -----------------------------------------------------------------------
1 year 5.71 10.99 6.72 1.80
- -----------------------------------------------------------------------
5 years 43.69 51.23 43.22 12.62
Annual average 7.52 8.62 7.45 2.41
- -----------------------------------------------------------------------
10 years 149.69 111.08 137.15 31.36
Annual average 10.39 8.40 9.78 2.99
- -----------------------------------------------------------------------
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
6 months ended 12/31/98
- -----------------------------------------------------------------------
Distributions (common shares)
- -----------------------------------------------------------------------
Number 6
- -----------------------------------------------------------------------
Income $0.3453
- -----------------------------------------------------------------------
Total $0.3453
- -----------------------------------------------------------------------
Share value NAV Market price
- -----------------------------------------------------------------------
6/30/98 $11.88 $10.625
- -----------------------------------------------------------------------
12/31/98 11.54 10.750
- -----------------------------------------------------------------------
Current return NAV Market price
- -----------------------------------------------------------------------
End of period
- -----------------------------------------------------------------------
Current dividend rate1 6.80% 7.29%
- -----------------------------------------------------------------------
Taxable equivalent2 10.46 11.22
- -----------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period.
2Assumes a corporation taxed at the 35% federal tax rate and that 100% of
the fund's distributions qualify for the 70% corporate dividends-received
deduction for corporations. Investment income may also be subject to the
federal alternative minimum tax.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding common shares.
Market price is the current trading price of one share of the fund. Market
prices are set by transactions between buyers and sellers on the New York
Stock Exchange.
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.
COMPARATIVE BENCHMARKS
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
<TABLE>
<CAPTION>
Portfolio of investments owned
December 31, 1998 (Unaudited)
PREFERRED STOCKS (96.3%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C> <C>
Automobiles (5.1%)
- --------------------------------------------------------------------------------------------------------------------------
67,600 Ford Motor Co. Ser. B, $2.063 dep. shs.
cum. preferred (pfd) $ 1,926,600
159,178 General Motors Corp. Ser. G, $2.275 pfd. 4,496,779
--------------
6,423,379
Banks (9.5%)
- --------------------------------------------------------------------------------------------------------------------------
70,000 Bankers Trust New York Corp. Ser. R, $1.269 cum. pfd. (CUS) 1,618,750
40,000 Chase Manhattan Corp. Ser. L, $4.50 cum.
Adjustable Rate Preferred (ARP) 3,875,000
62,300 Chase Manhattan Corp. Ser. C, $2.71 cum. pfd. 1,845,638
19,000 Chase Manhattan Corp. Ser. B, $2.44 cum. pfd. 498,750
116,566 Fleet Financial Group, Inc. Ser. E, $2.338 dep. shs. cum. pfd. 3,132,711
16,500 Wells Fargo & Co. Ser. B, $2.75 cum. ARP 837,375
--------------
11,808,224
Chemicals (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
14,250 du Pont (E.I.) de Nemours & Co., Ltd. Ser. B,
$4.50 cum. pfd. 1,240,641
6,800 du Pont (E.I.) de Nemours & Co., Ltd. Ser. A,
$3.50 cum. pfd. 504,900
--------------
1,745,541
Combined Utilities (15.6%)
- --------------------------------------------------------------------------------------------------------------------------
23,900 Baltimore Gas & Electric Co. Ser. 93, $7.125 cum. pfd. 2,697,713
40,000 Baltimore Gas & Electric Co. Ser. 95, $6.99 cum. pfd. 4,595,000
10,000 Baltimore Gas & Electric Co. Ser. 93, $6.70 pfd. 1,120,000
20,000 Florida Power & Light Co. Ser. S, $6.98 cum. pfd. 2,260,000
8,500 Florida Power & Light Co. Ser. U, $6.75 cum. pfd. 947,750
108,500 New York State Electric & Gas Corp. Ser. B,
$1.0975 cum. ARP 2,671,813
2,500 Pacificorp Sinking Fund $7.70 cum.pfd. 272,188
72,700 Pacific Gas & Electric Co. Ser. U, $1.76 cum. pfd. 1,981,075
6,750 Public Service Electric & Gas Co. $6.92 cum. pfd. 767,813
14,000 San Diego Gas & Electric Co. $1.763 cum. pfd. 374,500
67,000 San Diego Gas & Electric Co. $1.70 cum. pfd. 1,792,250
--------------
19,480,102
Computer Software (3.5%)
- --------------------------------------------------------------------------------------------------------------------------
158,611 IBM Corp. Ser. A, $1.875 dep. shs. pfd. 4,322,150
Consumer Services (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
5,000 Western Resources, Inc. $4.25 cum.pfd. 391,250
Electric Utilities (24.8%)
- --------------------------------------------------------------------------------------------------------------------------
20,000 Appalachian Power Co. $5.92 cum. pfd. 2,040,000
50,000 Connecticut Light & Power Sinking Fund
Ser. 92, $3.62 pfd. 2,350,000
18,000 Duke Power Co. Ser. S, $7.85 cum. pfd. 2,045,250
50,825 Duke Power Co. Ser. W, $7.00 cum. pfd. 5,641,575
4,715 Entergy Arkansas, Inc. $8.52 cum. pfd. 474,447
8,916 Entergy Gulf States, Inc. $7.56 cum. pfd. 908,318
9,000 Entergy Louisiana, Inc. $7.00 cum. pfd. 902,250
2,900 Entergy Mississippi, Inc. $4.92 cum. pfd. 250,850
5,000 Indianapolis Power & Light $5.65 cum. pfd. 538,750
3,000 Kentucky Utilities Co. $6.53 cum. pfd. 336,375
15,200 Niagara Mohawk Power Corp. Ser. A, $1.625 cum. ARP 372,400
20,000 Niagara Mohawk Power Corp. $2.375 cum. pfd. 522,500
20,000 Northern Indiana Public Services Ser. A, $3.30 cum. ARP 972,500
13,300 Pacificorp Sinking Fund $7.48 cum. pfd. 1,547,788
18,650 Peco Energy $7.48 cum. pfd. 2,009,538
15,000 Portland General Electric Sinking Fund
$7.75 cum. pfd. 1,723,125
13,500 Southern California Edison Co. $6.45 cum. pfd. 1,420,875
10,000 Southern California Edison Co. $6.05 cum. pfd. 1,052,500
10,000 Texas Utilities Electric Co. $6.375 cum. pfd. 1,026,250
75,580 Texas Utilities Electric Co. Ser. A, $1.875
dep. shs. cum. pfd. 1,983,975
25,000 Texas Utilities Electric Co. Ser. B, $1.805
dep. shs. cum. pfd. 643,750
20,000 Virginia Electric & Power Co. $6.98 cum. pfd. 2,227,500
--------------
30,990,516
Financial Services (24.6%)
- --------------------------------------------------------------------------------------------------------------------------
23,000 Bear Stearns Companies Inc.. Ser. E, $3.075 cum. pfd. 1,135,625
17,000 Bear Stearns Companies Inc. Ser. F, $2.86 cum. pfd. 801,125
14,000 Bear Stearns Companies Inc. Ser. A, $2.75 cum. ARP 687,750
20,000 Bear Stearns Companies Inc. Ser. G, $2.745 cum. pfd. 900,000
35,000 Citigroup, Inc. Ser. K, $2.10 cum. pfd. 949,375
24,600 Citigroup, Inc. Ser. M, $2.93 cum. pfd. 1,248,450
10,000 Citigroup, Inc. Ser. O, $8.25 cum. pfd. 1,032,500
54,000 Citigroup, Inc. Ser. R, $3.183 pfd. 2,909,250
13,000 Citigroup, Inc. Ser. R, $1.125 pfd. ARP 315,250
10,000 Donaldson, Lufkin & Jenrette, Inc. Ser. B,
$2.65 cum. pfd. 501,250
52,000 Heller Financial Inc. Ser. A, $2.031 cum. pfd. 1,358,500
63,850 Household International, Inc. Ser. 92-A, $2.063
dep. shs. cum. pfd. 1,779,819
52,000 J.P. Morgan & Co. Inc. Ser. H, $3.313 dep. shs. cum. pfd. 2,775,500
5,000 Lehman Brothers Holding, Inc. Ser. C, $2.97 pfd. 226,875
43,000 Lehman Brothers Holding, Inc. Ser. D, $2.835 pfd. 1,886,625
11,000 MBNA Corp. Ser. B, $1.375 ARP 277,750
36,400 MBNA Corp. Ser. A, $1.875 cum. pfd. 923,650
188,639 Merrill Lynch & Co., Inc. Ser. A, $2.25 dep. shs. cum. pfd. 5,800,649
30,000 Morgan (J.P.) & Co., Inc. Ser. A, $5.00 cum. ARP 2,737,500
45,000 Morgan Stanley $3.875 dep. shs. cum. pfd. 2,452,500
--------------
30,699,943
Gas Utilities (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
9,360 Puget Sound Energy, Inc. Ser. III, $2.125 pfd. 244,530
Metals and Mining (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
8,450 Aluminum Co. $3.75 cum. pfd. 626,356
Oil and Gas (7.3%)
- --------------------------------------------------------------------------------------------------------------------------
20,000 Anadarko Petroleum Corp. $5.46 dep. shs. pfd. 1,792,500
10,000 Apache Corp. Ser. B, $5.68 cum. pfd. 898,750
107,500 El Paso Tennessee Pipeline Co. Ser. A, $4.125 cum. pfd. 5,912,500
16,500 Washington Natural Gas Ser. II, $1.862 cum. pfd. 453,750
--------------
9,057,500
Oil Services (2.1%)
- --------------------------------------------------------------------------------------------------------------------------
111,000 LASMO PLC ADS Ser. A, $2.50 cum. pfd.
(United Kingdom) 2,664,000
Publishing (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
26,000 Newscorp Overseas Corp. Ser. A, $2.156 cum. pfd. 633,750
Water Utilities (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
11,400 United Water Resources, Inc. Ser. B, $7.625 cum. pfd. 1,169,925
--------------
Total Preferred Stocks (cost $117,463,528) $ 120,257,166
CONVERTIBLE PREFERRED STOCKS (2.6%) (a) (cost $2,677,115)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
109,270 Lehman Brothers Holding, Inc. $5.00 cv. pfd. $ 3,250,777
SHORT-TERM INVESTMENTS (1.3%) (a) (cost $1,684,225)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$1,684,000 Interest in $456,109,000 joint repurchase agreement
dated December 31, 1998 with Merrill Lynch, New York
due January 4, 1999 with with respect to various
U.S. Treasury obligations -- maturity value of
$1,684,898 for an effective yield of 4.80% $ 1,684,225
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $121,824,868) (b) $ 125,192,168
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $124,907,435.
(b) The aggregate identified cost on a tax basis is $121,828,327, resulting in gross unrealized appreciation and
depreciation of $5,570,069 and $2,206,228, respectively, or net unrealized appreciation of $3,363,841.
(CUS) This entity provides subcustodian services to the fund.
ADS after the name of a foreign holding stands for American Depository Shares representing ownership of foreign
securities on deposit with a domestic custodian bank.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
December 31, 1998 (Unaudited)
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $121,824,868) (Note 1) $125,192,168
- -----------------------------------------------------------------------------------------------
Cash 748
- -----------------------------------------------------------------------------------------------
Dividends and interest receivable 748,115
- -----------------------------------------------------------------------------------------------
Total assets 125,941,031
Liabilities
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 707,172
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 234,410
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 18,478
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 13,304
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,652
- -----------------------------------------------------------------------------------------------
Other accrued expenses 58,580
- -----------------------------------------------------------------------------------------------
Total liabilities 1,033,596
- -----------------------------------------------------------------------------------------------
Net assets $124,907,435
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) (435,610)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (230,787)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 3,367,300
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $124,907,435
Computation of net asset value
- -----------------------------------------------------------------------------------------------
Net asset value per share ($124,907,435 divided by 10,824,907 shares) $11.54
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended December 31, 1998 (Unaudited)
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Dividends $ 4,167,614
- -----------------------------------------------------------------------------------------------
Interest 25,716
- -----------------------------------------------------------------------------------------------
Total investment income 4,193,330
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 479,195
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 80,445
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 6,417
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,298
- -----------------------------------------------------------------------------------------------
Auditing 10,938
- -----------------------------------------------------------------------------------------------
Exchange listing fees 12,130
- -----------------------------------------------------------------------------------------------
Other 5,512
- -----------------------------------------------------------------------------------------------
Total expenses 597,935
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (7,212)
- -----------------------------------------------------------------------------------------------
Net expenses 590,723
- -----------------------------------------------------------------------------------------------
Net investment income 3,602,607
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 429,646
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the period (4,031,946)
- -----------------------------------------------------------------------------------------------
Net loss on investments (3,602,300)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 307
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
<S> <C> <C>
Six months ended Year ended
December 31 June 30
1998* 1998
- ---------------------------------------------------------------------------------------------------------------
Decrease in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 3,602,607 $ 7,437,064
- ---------------------------------------------------------------------------------------------------------------
Net realized gain on investments 429,646 4,105,390
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments (4,031,946) 3,320,443
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 307 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) -- 14,526,453
- ---------------------------------------------------------------------------------------------------------------
Distributions to common shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income (3,735,917) (7,683,270)
- ---------------------------------------------------------------------------------------------------------------
Issuance of common shares with
reinvestment of distributions 42,436 --
- ---------------------------------------------------------------------------------------------------------------
Auction preferred shares (Note 4) -- (60,000,000)
- ---------------------------------------------------------------------------------------------------------------
Total decrease in net assets (3,693,174) (53,156,817)
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 128,600,609 181,757,426
- ---------------------------------------------------------------------------------------------------------------
End of period (including distributions in excess of
net investment income of $435,610 and
$302,300, respectively) $124,907,435 $128,600,609
- ---------------------------------------------------------------------------------------------------------------
Number of fund shares
- ---------------------------------------------------------------------------------------------------------------
Common shares outstanding at beginning of period 10,821,255 10,821,255
- ---------------------------------------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions 3,652 --
- ---------------------------------------------------------------------------------------------------------------
Common shares outstanding at end of period 10,824,907 600
- ---------------------------------------------------------------------------------------------------------------
Auction preferred shares outstanding at
beginning of period -- 600
- ---------------------------------------------------------------------------------------------------------------
Auction preferred shares outstanding at
end of period -- --
- ---------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</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
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of year (common shares) $11.88 $11.23 $10.54 $10.57 $10.84 $12.39
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .33 .69 1.05 .80 .78 1.13
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.32) .68 .65 .03 .01 (1.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .01 1.37 1.70 .83 .79 --
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net investment income
- ------------------------------------------------------------------------------------------------------------------------------------
To preferred shareholders -- (.01) (.23) (.07) (.01) (.16)
- ------------------------------------------------------------------------------------------------------------------------------------
To common shareholders (.35) (.71) (.78) (.72) (.78) (1.04)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gains
- ------------------------------------------------------------------------------------------------------------------------------------
To preferred shareholders -- -- -- -- (.06) --
- ------------------------------------------------------------------------------------------------------------------------------------
To common shareholders -- -- -- -- (.24) (.38)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.35) (.72) (1.01) (.79) (1.09) (1.58)
- ------------------------------------------------------------------------------------------------------------------------------------
Auction preferred
share offering cost -- -- -- (.07) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Change in cumulative
undeclared dividends
on auction preferred shares -- -- -- -- .03 .03
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year
(common shares) $11.54 $11.88 $11.23 $10.54 $10.57 $10.84
- ------------------------------------------------------------------------------------------------------------------------------------
Market value, end of year
(common shares) $10.750 $10.625 $10.500 $8.875 $9.250 $9.750
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at market value
(common shares) (%)(a) 4.40 * 8.22 27.88 3.51 5.82 (6.78)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year
(total fund) (in thousands) $124,907 $128,601 $181,757 $174,064 $114,357 $142,629
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(c) .47 * 1.02 1.51 1.23 1.07 1.42
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(b) 2.84 * 5.77 7.57 6.88 7.39 8.06
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 14.74 * 30.63 19.27 35.13 27.39 73.63
- ------------------------------------------------------------------------------------------------------------------------------------
* 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. Prior period ratios exclude these amounts (Note 2).
</TABLE>
Notes to financial statements
December 31, 1998 (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. 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.
At June 30, 1998, the fund had a capital loss carryover of approximately
$657,000 available to offset future net capital gain, if any, which will
expire on June 30, 2004.
G) Distributions to shareholders Distributions to 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% 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 six months ended December 31, 1998, fund expenses were reduced by
$7,212 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 $560 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
Purchases and sales of securities
During the six months ended December 31, 1998, purchases and sales of
investment securities other than short-term investments aggregated
$18,620,006 and $18,604,344, 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, 1998,
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
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
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
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
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or
visit our website (www.putnaminv.com) any time for up-to-date
information about the fund's NAV.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
www.putnaminv.com
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PUTNAM
INVESTMENTS
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