3 Charts Show Why Investors Should Be Wary of Bank Dividends

If you love dividend stocks, then you should take note of the trend in quarterly payouts at JPMorgan Chase, Wells Fargo, and Citigroup.

Apr 21, 2014 at 5:39PM


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 has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Procter & Gamble, and Wells Fargo; owns shares of Citigroup, Coca-Cola, JPMorgan Chase, and Wells Fargo; and has options on Coca-Cola. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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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