Last year was the worst year on record for dividends as more companies slashed their dividends than ever before, according to Standard & Poor’s.

Of the 7,000 publicly owned companies on which S&P collects dividend data, 804 cut their dividends in 2009, costing investors over $58 billion in income, according to the ratings and research firm. By comparison in 2007, only 110 companies cut their dividend.

Still, things are looking up. In the fourth quarter of last year, only 74 companies cut their dividend versus the record 288 companies that cut their dividend in the fourth quarter of 2008. Howard Silverblatt, a senior index analyst at S&P, says he expects the trend to continue. This year “should be better,” Silverblatt says. “Most gains will be in the second half of the year as companies wait to see that their earnings and the demand for their products are improving,” he says.

However, Silverblatt warns, any recovery could be railroaded if the economy worsens or unemployment reaches the 10.8% high of December 1982. In the best-case scenario, Silverblatt doesn’t predict a return to pre-crash dividend levels until 2012 or 2013.

Josh Peters, editor of Morningstar’s DividendInvestor newsletter, agrees. He says that a large proportion of dividends were previously provided by financial companies, which are no longer in a position to pay out. “Look at Citigroup Inc. They’ve gone from 5 billion shares outstanding to 29 billion. They’ve got so many more mouths to feed,” Peters says. “It could be a lifetime for the Citi dividend to come back to pre-crash levels,” he says. Indeed, Silverblatt estimates that it would now cost Citigroup $64 billion to pay out dividends at its pre-crash level.

But, Peters points to other financials, such as Wells Fargo & Co., that are in better shape. He says that while they’ve also had to issue new shares, they’ve expanded their business and earning power and should be able to restore their dividend and grow it in the future.

Financial services companies used to represent 30% of all dividend payments but now only make up 9% of payments, according to Silverblatt. He favors companies in the consumer staples sector, such as Colgate-Palmolive Co. Consumer staples companies now make up 17.4% of all dividend payouts. “They’re now the largest dividend payers and the most consistent,” he says.

Meanwhile Peters points to diversified healthcare companies such as Abbott Laboratories. Peters believes they’re in a position to raise their dividend 8 to 10% per year for the next five or more years due to their diversified interest that ranges from pharmaceuticals to Similac baby food. “They don’t just rely on developing a new drug or device for growth. They’re able to channel their earnings into whatever business provides the best return,” he says.