3 Types of Financial Dividends, Part 1: Income Dividends

Identifying some of the best yields among major banks.

Jan 12, 2014 at 7:30PM

Banks are traditionally solid dividend-paying institutions to which investors flock for income and capital appreciation. However, events over the past several years have caused havoc in the financial industry and thus shaken up the dividend system. In this series (see also Part 2 and Part 3), I'll look at three types of dividend payers in the financial industry and what catalysts may lie ahead.

Cash dividends are, by definition, income, but I refer to the group in this part as offering "income dividends," since these stocks could realistically be used to generate meaningful levels of income, unlike some companies I'll mention later in the series.

U.S. financial dividends
Weathering the financial storm rather well were JPMorgan Chase (NYSE:JPM) and Wells Fargo, which both pay dividends yielding 2.6%. Dividends of this level come from financial institutions at which capital levels are determined to be strong enough that both the banks and regulators allow cash to be returned to shareholders.

Because of this dividend, holders of the Wells Fargo TARP Warrants (NYSE:WFC-) have become the first of the big bank warrant holders to benefit from dividends paid by the underlying security. With the threshold for dividend payouts reached, the strike price on the Wells Fargo warrants adjusts down with every dividend.

Holders of JPMorgan Chase TARP Warrants (NYSE:JPM-) are on the cusp of seeing strike price reductions on their warrants, with the current dividend payout being the maximum the bank can pay without triggering the strike price reduction feature. JPMorgan has been embroiled in lawsuits lately, possibly holding back a dividend increase. However, if the bank begins to see a trickling off of these legal troubles, the dividend could see a boost.

Canadian banks
Canada's banks were among the best positioned in the financial crisis and have rewarded long-term investors with less volatile stock prices and large dividends compared with U.S. financials. Fortunately U.S. investors can easily access shares of these banks through American depositary receipts listed on the NYSE.

Toronto Dominion Bank (NYSE:TD) is among Canada's largest financial institutions and currently pays a dividend of 3.6%. Although TD is based in Canada, the bank has a reach far beyond its home country. With a sizable stake in TD Ameritrade (currently restricted to no more than 45%), TD has significant exposure to the U.S. brokerage market. TD also gained a foothold in the auto financing market when it acquired Chrysler Financial from Cerberus Capital Management back in 2010. This should allow TD to benefit from both the banking industry and a rebound in car sales.

For Canadian bank investors, Canadian Imperial Bank of Commerce (NYSE:CM) also looks attractive, trading at less than 10 times forward earnings and paying one of the highest dividends in Canadian banking at 4.5%. This forward P/E ratio is on par with many U.S. banks despite the far higher dividend at CIBC. Conservative investors will also be pleased by the risk levels at CIBC, which, according to Bloomberg, make CIBC the safest bank in North America, a title it has now earned two years in a row.

Income dividends
Wells Fargo, JPMorgan Chase, TD, and CIBC all pay dividends that can generate significant levels of income for investors. The reason stems from their stability compared with lower yielding financials. In the next part of this series, I'll look at banks paying far smaller, almost non-existent dividends, and whether there are catalysts ahead for dividend increases and share price gains.

Collecting the best yields
One of the dirty secrets that few finance professionals will openly admit is that dividend stocks as a group handily outperform their non-dividend-paying brethren. The reasons are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Alexander MacLennan has no position in any stocks mentioned. The Motley Fool recommends TD Ameritrade and Wells Fargo and owns shares of JPMorgan Chase, TD Ameritrade, and 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 Motley Fool has a disclosure policy.

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