Dividend stocks have been all the rage over the past few years. Given abysmal bond yields coupled with the perceived safety of dividend stocks relative to growth stocks, some have even gone so far as to predict a dividend bubble. As my colleague Morgan Housel noted earlier this year: "starved of yield with interest rates near 0%, investors are tripping over themselves to get dividends these days." It's for this reason that S&P 500 stocks with the highest dividend payout paradoxically began last year with the highest P/E ratios.
But for the smartest investors, it's not the current yield that matters, but rather the future yield. Take Bank of America (NYSE: BAC ) which currently pays out only $0.01 per share a quarter in dividends. Assuming the nation's second largest bank by assets ultimately earns between $30 and $40 billion a year, which I believe it will, that payout could easily reach $0.25 over the next five to 10 years, equating to a yield on original investment of more than 8%.
The question then is not what a stock is currently yielding, but rather whether the dividend payout will increase with time. With this in mind, I've taken a look at some of the most popular dividend stocks in the financial industry to see whether or not they are likely to increase their dividend payouts in 2013. Up today is Wells Fargo (NYSE: WFC ) , the nation's biggest mortgage originator and fourth largest bank by assets.
Is a dividend hike in sight for Wells Fargo?
To cut to the chase, I believe Wells Fargo will increase its quarterly dividend payouts this year. In the first case, as I've discussed before, prior to the financial crisis, Wells Fargo paid out anywhere between 35% and 50% of its earnings to shareholders. Since then, it reduced its distribution in response to heightened capital requirements and increased regulatory oversight of capital allocation plans. But while its payout ratio was only 23% at the end of the third quarter of 2012, the more important metric to watch is the trend. For the first three quarters of 2012, Wells Fargo paid out $0.60 per share in dividends. This was double the comparable amount in 2011 and triple the same figure from 2010. Consequently, it appears to me that the bank's payout ratio is heading back to its pre-crisis levels.
In the second case, Wells Fargo is making money hand over foot. To say that 2012 was a banner year for the California-based lender would be an understatement. From the third quarter of 2011 through the third quarter of last year, it earned an astounding $17.9 billion. That's more than all but three of the constituents on the Dow Jones Industrial Average, including Wal-Mart and McDonald's, which, by means of comparison, earned $16.6 billion and $5.5 billion, respectively, over the same time period. The only blue-chip components to outperform Wells Fargo in this regard are the two oil majors, ExxonMobil and Chevron, and JPMorgan Chase (NYSE: JPM ) , the nation's largest bank by assets.
And finally, but most obviously, Wells Fargo's CEO John Stumpf outright acknowledged that the bank would like to increase its dividend. Speaking at a conference sponsored by Goldman Sachs (NYSE: GS ) at the end of last year, Stumpf said that the lender will ask for regulatory approval, presumably following the stress tests in the first quarter of this year, to increase the amount of capital it returns to shareholders.
At the same conference, moreover, and despite its record profits over recent quarters, Stumpf went on to note that: "I do believe we can grow net interest income into the future, even in low rates and slow growth. We have more buttons to push." Assuming it gets approval to do so, in turn, it follows that both the payout ratio and underlying earnings figure could grow simultaneously, giving shareholders two bites at the same apple.
Want to learn more about Wells Fargo?
Wells Fargo's dedication to solid, conservative banking helped it vastly outperform its peers during the financial meltdown. Today, Wells is the same great bank as ever, but with its stock trading at a premium to the rest of the industry, is there still room to buy, or is it time to cash in your gains? To help figure out whether Wells Fargo is a buy today, I invite you to download our premium research report from one of The Motley Fool's top banking analysts. Click here now for instant access to this in-depth take on Wells Fargo.