Bank Dividends Are Coming: Here's What You Need to Know

It started last fall, when JPMorgan Chase (NYSE: JPM  ) said it planned on reinstating its dividend to 30%-40% of normalized earnings as soon as the Fed allowed it to.

Then Bank of America (NYSE: BAC  ) joined in. In December, the bank said it also wants to reinstate its dividend to 30% of earnings, once the Fed gives the green light.

Citigroup (NYSE: C  ) wasn't as specific, but said this week that it wants to resume paying a dividend next year.

Yesterday was Wells Fargo's (NYSE: WFC  ) turn. CEO John Stumpf noted at an investor conference that he plans to devote 30% of his bank's earnings to a dividend.

Using the 30% payout ratio that seems so popular, it's simple math from here. Here's what kind of yields we're talking about:

Bank

Forward EPS Estimate

Dividend at 30% of EPS

Yield at 30% Payout of EPS Estimate

JPMorgan Chase

$4.77

$1.43

3.14%

Bank of America

$1.31

$0.39

2.76%

Citigroup

$0.43

$0.13

2.83%

Wells Fargo

$2.86

$0.86

2.68%

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

In short, these banks would offer something in the neighborhood of 3% yields. Not as much as banks typically yielded before the financial crisis, but still above the average S&P 500 company's yield.

This is all fine and well for the big banks. They've rebuilt a tremendous amount of capital over the past two years, and they're probably in a reasonable position to return some of it to shareholders as earnings pile up.

Owning common stock in these companies would still make me nervous -- there's still just too much insanity and funny business left over from the bubble years. Still, as a rule of thumb, I'd never bet against any company with a lobbyist or a strong dividend. Banks are knee-deep in the former, and about to reclaim the latter.

Fool contributor Morgan Housel owns Bank of America preferred. The Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On March 14, 2011, at 1:38 PM, pondee619 wrote:

    "Owning common stock in these companies would still make me nervous "... " Still, as a rule of thumb, I'd never bet against any company with a lobbyist or a strong dividend. Banks are knee-deep in the former, and about to reclaim the latter."

    So, which is it, Morgan. Do owning banks make you too nervous to buy or do you not bet against them and buy. Life is more difficult when you have to make a decision. Not buying is a decision. what was your call?

  • Report this Comment On March 14, 2011, at 1:42 PM, TMFHousel wrote:

    pondee,

    Not owning and not shorting aren't mutually exclusive.

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