No one remembers the financial crisis and market meltdown of 2008 and 2009 better than dividend investors. They suffered the double-hit of plunging stock prices along with big dividend cuts from many of their favorite stocks.
But in the latest sign that the stock market has put its history behind it, the sector that the crisis arguably hit the hardest is about to get their stocks back on the dividend bandwagon. But will investors welcome those companies back to the dividend-paying fold with open arms? Or will memories of disappearing income and ugly brokerage statements keep investors skeptical about their futures?
The moment you've been waiting for
Expectations are building that big banks Wells Fargo (NYSE: WFC ) , JPMorgan Chase (NYSE: JPM ) , and US Bancorp (NYSE: USB ) will announce by next Monday their plans to raise their dividends. Currently, each of the three banks makes only a token payment of $0.05 per quarter, representing a yield of less than 1% in each case.
Investors have anticipated higher dividends from banks for several months. For instance, back in December, the heads of Wells Fargo, Bank of America (NYSE: BAC ) , and PNC (NYSE: PNC ) expressed their desire to return capital to shareholders through dividends and share buybacks. But just as government pressure following the TARP bailouts during the financial crisis almost certainly played a role in the banks' decisions to cut their dividends two years ago, the Federal Reserve's input on the banks' capital plans should be a key part in whatever decisions the banks make in restoring their payouts.
Reports from multiple sources say that the Fed might tell some banks about the results of the latest round of stress tests as early as today. Depending on just how eager banks are to get their payouts back in the direction of pre-crisis levels, you could start hearing announcements even before the weekend begins.
Just how big will dividends be?
Obviously, the decision each bank makes will depend on its particular circumstances, including capital requirements, loan loss provisions, and other liquidity needs. But if the banks start with dividends equal to a modest 20% of estimated 2011 earnings, as analysts from RBC Capital suggest could be a reasonable starting point, you could see some huge increases from current levels:
Prospective Yield at 20% of 2011 Est. EPS
|State Street (NYSE: STT )||0.1%||1.7%|
|Capital One (NYSE: COF )||0.4%||2.1%|
|Bank of America||0.3%||1.9%|
Source: Yahoo! Finance.
There's no denying that the increases in yields would be a welcome change to shareholders who've endured much lower income for years.
Even with the increases, these dividend levels won't approach what many of these stocks paid during the height of the boom in financials. As recently as late 2007, Bank of America offered a yield above 6%, while JPMorgan Chase had a more conservative yield in the 3.5% range.
Will investors come back?
Whether investors will trust bank stocks again is a tough call. Certainly, yield-hungry investors have rewarded many high-dividend stocks, and as long as interest rates remain low, higher dividends will attract investor attention. But having endured big slashes in their payouts once before, investors will likely think twice before jumping head-first back into the financial sector.
Perhaps more importantly for long-term investors, though, dividend increases won't make up for the fact that these stocks had spectacular losses during the 2008-09 bear market. Although a few, such as JPMorgan and Wells Fargo, have seen their stock prices approach their pre-crisis highs, several others, including State Street and Bank of America, have still lost huge portions of their value despite some impressive comebacks in the past two years.
Stay smart with dividends
The real test is whether banks can sustain their profits. A very favorable yield curve has enhanced profits for financial stocks, but when that comes to an end, banks will have to remember how to make money the old-fashioned way: by making smart loans that bring in better returns than what they pay their deposit customers. If they can do that, then higher dividend yields should be sustainable. But if they can't, then those dividends could once again disappear.
Be the first to know about your favorite bank by adding it to your watchlist:
- Add Wells Fargo to My Watchlist.
- Add State Street to My Watchlist.
- Add JPMorgan Chase to My Watchlist.
- Add US Bancorp to My Watchlist.
- Add Capital One to My Watchlist.
- Add Bank of America to My Watchlist.
- Add PNC Financial to My Watchlist.
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