With other sources of investment income drying up fast, more investors are relying on dividend stocks to provide them with the cash they need. Financial stocks used to be a great source for rich dividend yields, but the financial crisis forced most banks to slash their dividends.
Today, I want to look at Bank of America (NYSE:BAC). The bank paid a dividend of $0.64 per share every quarter as recently as September 2008, but in the aftermath of the mortgage meltdown, B of A reduced that payout to a single penny per share to comply with restrictions on taking TARP bailout money. With the banking crisis now largely behind us, can investors expect a higher dividend in the near future?
Where Bank of America stands
B of A is one of the last banks to make a move with its dividend. Wells Fargo (NYSE:WFC), which cut its payout from $0.34 per share to $0.05 in 2009, has since raised it twice to make its most recent payment $0.22 per share. JPMorgan Chase (NYSE:JPM) has hiked its dividend by 500% since its early 2009 cut to a nickel per share, and the current per-share payout of $0.30 has almost caught up to its pre-crisis level of $0.38. And among more regionally focused banks, M&T Bank (NYSE:MTB) managed to avoid having to cut its dividend at all, while US Bancorp (NYSE:USB) has nearly quadrupled its dividend in the past three years.
Interestingly, some have criticized the decisions that these banks have made. Rather than looking at it from the perspective of shareholders, critics argue that big dividend increases came at the cost of reserve capital that banks desperately need. In that light, B of A's many recent moves to raise capital through asset sales are consistent with its decision to keep its low dividend unchanged.
Of course, it's important to remember that B of A's failure to raise its payout wasn't entirely its own decision. In 2011, the bank asked for approval from the Federal Reserve to increase its dividend to shareholders, but the Fed refused. It's easy to understand how having been turned down once, B of A would be reluctant to ask for permission a second time.
But another reason B of A may have chosen to keep its payout low is that it's paying massive amounts of money out in settlements. For instance, the bank recently settled a class action lawsuit in connection with its buyout of Merrill Lynch during the financial crisis that will cost it about $2.43 billion. It's also on the hook for its share of a $25 billion settlement between multiple mortgage lenders and federal and state regulators and authorities over what's now known as Foreclosuregate. With further potential problems coming from the LIBOR scandal, keeping a reserve of cash seems prudent right now.
When will the dividend rise?
To get an idea of when B of A might start pushing its dividend back up toward pre-crisis levels, the first thing to realize that even after a huge recovery, the bank's earnings are still relatively weak. In 2006, B of A earned more than $21 billion, giving it $4.59 in annual diluted earnings per share that easily supported its dividend of $2.12 per share. By contrast, in its two most recent quarters, B of A earned $0.03 and $0.19 per share, respectively. That may be enough to support a modest dividend increase of a penny or two per share, but it's clearly not enough to support the $0.50 to $0.64 quarterly dividends that prevailed before the crisis.
Analysts expect Bank of America to earn $0.91 per share next year. If the bank can prove to the Fed's satisfaction that those earnings are sustainable, then it might get permission to bump up its payouts somewhat in 2013. But even if that happens, it probably won't be more than a few pennies per share. Investors shouldn't expect payouts ever to get back to levels that prevailed before the financial crisis.
Fool contributor Dan Caplinger owns warrants on JPMorgan Chase and Wells Fargo. You can follow him on Twitter, @DanCaplinger. The Motley Fool owns shares of JPMorgan Chase, Bank of America, and Wells Fargo. Motley Fool newsletter services have recommended buying shares of Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.