Bank Shareholders: Forget a Dividend Increase

Regulators have warned banks not to return capital to shareholders through dividend increases or share repurchases until economic and regulatory uncertainty subsides. That may be irksome for dividend-focused investors, but it's a prudential measure -- one that could be in effect longer than shareholders expect.

A sector that is no longer pulling its weight
Financials were forced to slash dividends in order to preserve capital in response to the financial crisis. As a result, the sector hasn't been pulling its weight in on this front, as the following table makes plain:

Financials

Aggregate Value

% of S&P 500

Common Dividends Paid, Q4 2009*

$2.7 billion

7.5%

Float-Adjusted Market-Capitalization

$1.7 trillion

16.3%

*Float-adjusted basis.
Source: Author's calculations, based on data from Capital IQ, a division of Standard & Poor's.

We're used to technology stocks hoarding cash, but the dividend yield on financials ordinarily exceeds that of the index. JPMorgan Chase (NYSE: JPM  ) , one of the "winners" of the credit crisis, is chomping at the bit to raise its dividend, but authorities may be concerned that enabling only some banks to do so would stigmatize banks that don't receive the go-ahead.

Less than 1%!
At present, the dividend yield on the shares of all the largest banks is lower than 1%:

Company Name

Dividend Yield (%)

Goldman Sachs (NYSE: GS  )

0.8%

US Bancorp (NYSE: USB  )

0.8%

Morgan Stanley (NYSE: MS  )

0.7%

Wells Fargo (NYSE: WFC  )

0.7%

JPMorgan Chase (NYSE: JPM  )

0.5%

Bank of America Corporation (NYSE: BAC  )

0.2%

Citigroup (NYSE: C  )

-

S&P 500

1.9%

Source: Capital IQ, a division of Standard & Poor's.

Bank shareholders will need to be patient
Regulators are right to take a firm stand here, as the sector continues to face significant risks (commercial real estate, for example) that could surface during the next several quarters. Shareholders should be prepared for quite a wait -- new bank regulations are unlikely to be finalized before the end of the year. As far as macroeconomic risks are concerned, they are likely to persist for the next several years. Investors shouldn't expect a fatter dividend check from their banks anytime soon.

Interested in stocks that face no such restrictions in rewarding their shareholders with a fat dividend? Here are six stocks that the Motley Fool's top dividend-focused analysts are watching.

Fool contributor Alex Dumortier has no beneficial interest in any of the stocks mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 11, 2010, at 8:03 PM, megalong wrote:

    I have no clue what the first table means. Care to elaborate?

  • Report this Comment On March 12, 2010, at 1:13 AM, TMFAleph1 wrote:

    The S&P 500 is divided into 10 sectors including Financials.

    The second column in the table ('Aggregate Value') contains the total amount of common dividends paid by Financial companies in the S&P 500 (on a float-adjusted basis) and the total float-adjusted market capitalization of the same companies.

    The third column (% of S&P 500) shows the values in the second column as a percentage of the same quantitities across all companies in the S&P 500.

    The main conclusion from the table is that, during the fourth quarter, financial companies contributed a lesser share of the S&P 500's total dividends than their weighting in the index.

    Best,

    Alex Dumortier, CFA

  • Report this Comment On March 12, 2010, at 7:51 AM, MarkWennstein wrote:

    I say forget about those financials (for dividend investing) and pick a high(er) yielding stock!

    http://www.topyields.nl/Top-dividend-yields-of-NYSE.php

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