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One reason so many investors follow the Dow Jones Industrials (DJINDICES: ^DJI ) is that all 30 of its component stocks pay dividends. Yet some Dow stocks are better about rewarding their shareholders with high dividends than others.
In particular, three Dow stocks have dividend yields that are less than 1.5%. Given that the average dividend yield for the Dow overall is more than 2%, these lagging stocks raise an obvious question: should companies that are skimping on their payouts raise their dividends to keep up with their Dow peers? Let's take a closer look at these three stocks to evaluate whether they should boost their dividend payouts.
Bank of America (NYSE: BAC )
Bank of America has the lowest dividend yield in the Dow, paying out just 0.3%. That wasn't the case before the financial crisis, when it and several of its banking peers had quite attractive yields on their payouts. Yet after the mortgage meltdown wrought havoc on bank balance sheets, B of A cut its dividend to a single penny per share quarterly in order to qualify to receive TARP bailout funds.
For years since the crisis, B of A has worked hard to restore its financial condition, selling off non-core assets and building up its balance-sheet strength. Earlier this year, many analysts expected B of A to raise its dividend after passing the Federal Reserve's stress tests. Although the bank did win approval to buy back $5 billion of its common shares and redeem $5.5 billion in preferred shares, it chose to leave its dividend unchanged.
B of A's yield now lags behind most other major banks, which have restored a substantial portion of the payouts that they previously cut. Given some of the new potential legal liabilities that have arisen recently for B of A, though, keeping cash on hand rather than increasing dividends might have been a more prudent decision for the bank.
Disney (NYSE: DIS )
Multimedia giant Disney isn't nearly as stingy as Bank of America, but at about 1.2%, its yield is still relatively low compared with the rest of the Dow. Unlike most other companies, Disney only makes a single annual dividend payment, and although the company has made substantial annual increases of between 14% and 50% in each of the past three years, its stock price has performed so well that the higher payouts haven't boosted yields very far.
With a payout ratio of just 23%, Disney clearly earns enough money to raise its dividend at a quicker pace going forward. Yet keeping more cash on hand has helped the company maintain the flexibility to make major strategic moves, such as its $4 billion acquisition of Lucasfilm late last year. Moreover, with the increasing costs of producing and obtaining content, Disney will want to make sure it doesn't put itself in a position to rely on mercurial capital markets for financing needs.
Nevertheless, Disney could raise its dividend to the 2% range without sacrificing much in terms of financial flexibility. Look to see whether such a move comes when the company declares its annual dividend toward the end of this year.
American Express (NYSE: AXP )
High-end card company American Express also carries a low yield of less than 1.3%. It, too, has an extremely low payout ratio near 20%, indicating just how little of its earnings power it shares with its investors. Admittedly, AmEx has made modest moves to increase its payout in the past, with a 15% boost coming after the company passed the Fed's stress tests earlier this year.
Whether AmEx needs as much liquidity as it maintains depends on which strategic direction it takes in the future. With big competition brewing in the mobile payments arena, AmEx might need substantial funds for capital expenditures if it wants to make a strong foray into the space. Yet if it merely chooses to take on projects like its Bluebird prepaid card offering, AmEx could afford to return more of its capital through dividends without compromising its financial health.
In general, stocks that pay dividends inspire confidence among shareholders because they prove that companies have investors' interest in mind. These three Dow stocks might not boost their dividends in the near future, but if their long-term strategies pan out, then shareholders should expect rewards through higher dividends in the long run.