These Stocks Could Be Tomorrow's Dividend Kings

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:

Bank

Current Yield

Prospective Yield at 20% of 2011 Est. EPS

Wells Fargo 0.6% 1.8%
State Street (NYSE: STT  ) 0.1% 1.7%
JPMorgan Chase 0.4% 2.1%
US Bancorp 0.7% 1.6%
Capital One (NYSE: COF  ) 0.4% 2.1%
Bank of America 0.3% 1.9%
PNC Financial 0.6% 1.8%

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:

Go beyond the banks for some great dividend-paying stocks. Find out more about the best in the Fool's free special report, "13 High-Yielding Stocks to Buy Today."

Fool contributor Dan Caplinger figured the banks would be back at some point. He doesn't own shares of the companies mentioned in this article. The Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo; and through a separate account in its Rising Star Portfolios, the Fool also has a short position in Bank of America. 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. You can take the Fool's disclosure policy all the way to the bank.


Read/Post Comments (6) | Recommend This Article (42)

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 19, 2011, at 2:31 PM, fwhite590 wrote:

    SUBAYE

    ¿Its true that a private equity fund will buy 51% of the company a price of 7 dollars a share?

    Thats is 100% gain.

  • Report this Comment On March 19, 2011, at 5:55 PM, daviesmonroe wrote:

    Thank you for this article Dan, I'm hopeing to see some raised dividends in the banking sector.

    Especially STT looks interesting. I'll keep an eye on that one myself.

    However, if you start with a very low dividend yielding stock to begin with, you might be better off with a higher yielding stock with a more proven track record.

    For some high yield ideas, check out http://goo.gl/3y8uz

  • Report this Comment On March 19, 2011, at 10:19 PM, ftl7 wrote:

    Just my opinion. But if you invest in banks, especially B of A you are a FOOL; and not a Motley one. I tried to get in with two. Waiting, waiting... and then BOOM; they crashed hard. Better opportunities elsewhere; but I am not a CFA, etc.

    Frank

  • Report this Comment On March 20, 2011, at 9:22 AM, jimmy4040 wrote:

    On that list, I would probably stay away from BAC and WFC. They do a large mortgage business, and have the headline risk from the coming mortgage settlement, and the revenue risk in the second half of the year from rising interest rates and a declininig housing market.

  • Report this Comment On March 25, 2011, at 11:52 AM, SkepticI wrote:

    I hate banks...never known one to be trusted...just kidding, but there are some I am wary of due to the many customer dealings I've had that I don't like as well as the bad reports I've had from others. Chase and BOA are two of them. I've done business with both and am moving all that business AWAY from them, encouraging my friends and family to do the same. Their recent business practices, methods and activities are poor (I can elaborate if need be) there are better more service oriented banks competing with them. The serious mistakes BOA made with ML acquisition speak to their arrogance and big bank emphasis on big over competence. After being an ML customer for over 30 years I am moving my assets out of there as fast as I can prudently do so. When the basic business and confidence therein erodes for a Bank, trouble is not far from the door. Be wary.

  • Report this Comment On March 27, 2011, at 1:19 PM, GOFORAWILDRIDE wrote:

    R U kidding us????

    JPIG is in so many lawsuits it will implode in on itself with all the fines and payouts like the one that is about to happen via WAMU.

    That is going to cost them 10's of billions if not 100 billion.

    They will go under BK themselves as Jamie Dimon has stated many times that the shareholder should get screwed in BK to protect the status quo!

    Stay away from JPIG as they are soon to be the biggest loser bank of all time!!!!

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