3 Ways Bank of America Corp Could Become a Dividend Powerhouse

Bank of America should be able to benefit from three key developments which should lead to higher earnings and higher dividend payments in the future.

Jul 14, 2014 at 9:56AM

Source: Company

Bank of America (NYSE:BAC) has a lot going for itself. Though legal troubles continue to cloud the company's long-term value, with a little bit of time the banking giant should be able to transform itself into a viable dividend payer and achieve a higher valuation in the market.

Bank of America currently pays investors a disappointing and symbolic dividend of $0.01 per share per quarter, which is more a reminder of the impact of the financial crisis on the bank rather than a serious attempt at shareholder remuneration.

The bank intended to hike its dividend to $0.05 per share in the second quarter accompanied by a $4.0 billion share repurchase program, but Bank of America's mistake in calculating its regulatory capital caused those plans to be scrapped in April 2014.

Bank of America's stock currently yields 0.26% -- practically nothing. Even if Bank of America had increased its quarterly dividend to $0.05 per share, the bank would still yield only 1.25% which is not enough to get investors excited.

J.P. Morgan, for instance, yields about 3% and Bank of America will ultimately have to hike its dividend payments in order to become more competitive on the dividend metrics.

Just because Bank of America currently yields significantly less than other players in the bank sector doesn't mean it always has to be that way. In fact, Bank of America should benefit from three major developments in its business, that should provide at least some tailwinds to justify higher dividends down the road.

While investors shouldn't expect Bank of America to yield 4-5% in the near future, I think the bank can reasonably achieve a dividend yield of 2-3% over the next couple of years due to three themes that should boost the bank's earnings and its cash flow and give the bank more room to step up its shareholder remuneration.

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Kingkarn Amjaroen owns shares of Bank of America. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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