New York Times Co. faces increased financial pressure to cut its dividend as credit quality deteriorates amid record advertising declines.

Bondholders are paying for the decision last year by the Sulzberger family-controlled board to raise the quarterly dividend 31% to 23 cents a share. The extra yield investors demand to own New York Times bonds instead of U.S. Treasuries has more than doubled in 2008. The cost to protect the debt against default has climbed 27 basis points since the newspaper publisher posted earnings July 23, meaning investors are betting that credit quality will weaken further.

Moody’s Investors Service says one way for New York Times to save its rating, a step above junk and in danger of being cut, would be to reduce the dividend costing $132 million a year.

“They’d have potentially more cash available to fund investments and debt reduction,” an analyst from Moody’s, John Puchalla, in New York said in an interview. “Depending on how they use that cash that’s freed up, that could be beneficial to the rating.”

Shareholders also are losing out with a 43% drop in the stock since March 2007, when the New York-based company’s board raised the dividend the most in a decade to appease investors. The payout, coupled with an accelerated 16% drop in June ad sales, has contributed to higher borrowing costs while failing to support the stock. The Class A shares fell 85 cents, or 6%, to $13.24 in New York Stock Exchange composite trading, the biggest drop in a month. Credit-default swaps used to speculate on New York Times’ creditworthiness or to hedge against losses are trading as if the company already was rated junk, according to data from Moody’s credit strategy group.

The contracts, costing $397,000 a year to protect $10 million in debt for five years, trade as if the company had a Ba3 rating from Moody’s, three levels below its actual Baa3 rating, the data show. Moody’s on July 29 changed its credit- rating outlook to negative on concern the advertising slump will worsen.