3 Charts Show Why Investors Should Be Wary of Bank Dividends

Bank stocks are some of the most popular investments for dividend-seeking investors. They're also some of the worst.

The reason is simple: Their dividends are much less reliable than other dividend-paying stalwarts such as Procter & Gamble, Wal-Mart, and Coca-Cola.

Check out Figure 1, which illustrates the recent history of these companies' dividends. This is exactly what you want to see from dividend-paying stocks: uninterrupted payouts coupled with consistent growth.

PG Dividend Chart

Meanwhile, take a look at Figure 2, which illustrates the history of dividend payouts at two of the nation's preeminent banks, JPMorgan Chase (NYSE: JPM  ) and Wells Fargo (NYSE: WFC  ) .

See what happened in 2009, when the financial crisis struck? JPMorgan Chase and Wells Fargo slashed their quarterly payouts to fractions of their former selves.

JPM Dividend Chart

And, remember, these are the two best big banks! Want to see what happens to the bottom of the barrel?

Check out Figure 3, which charts Citigroup's (NYSE: C  ) quarterly dividend payout. As you can see, if it weren't for the arguably symbolic penny per share that Citigroup continues to lavish on shareholders each quarter, it wouldn't even fall into the category of dividend stocks.

C Dividend Chart

Why are banks so much more susceptible to dividend cuts than, say, a consumer-staples company or discount retailer?

In the first case, banks by their very nature are volatile entities, as they're nothing more than leveraged funds; and leveraged funds operate at the whim of the credit cycle.

"No one has the right to not assume that the business cycle will turn," says JPMorgan Chase CEO Jamie Dimon. "Every five years or so, you have got to assume that something bad will happen."

Under the prevailing regulatory regime, moreover, bank capital plans (which encompass both dividends and share buybacks) are now beholden to federal regulators, who, it's important to recognize, have neither a legal nor moral duty to maintain a particular payout in the midst of economic turmoil.

My point here is not to scare you away from bank dividend stocks, as there are, in fact, great ones out there -- New York Community Bancorp comes to mind. My point instead is to merely alert you to the fact that not all dividend stocks are created equal, and bank stocks in particular should be assessed with a critical eye before making their way into your portfolio.

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John Maxfield

John is The Motley Fool's senior banking specialist. If you're interested in banking and/or finance, you should follow him on Twitter.

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Related Tickers

8/28/2015 4:01 PM
C $53.28 Down -0.16 -0.30%
Citigroup Inc CAPS Rating: ***
JPM $64.13 Down -0.35 -0.54%
JPMorgan Chase & C… CAPS Rating: ****
WFC $53.54 Down -0.49 -0.91%
Wells Fargo CAPS Rating: *****