Will Bank of America Raise Its Dividend in 2018?

The financial industry went to the brink of extinction in 2008, and Bank of America (BAC 0.35%) was one of the most dramatically affected banking institutions during the crisis. B of A has done an excellent job of recovering from its near-disaster, but even after seeing its shares jump nearly 30% so far in 2017, the bank still has a long way to go before its stock will get back to where it traded in the mid-2000s. It took an especially hard hit during the financial crisis in 2008, and has taken longer than some of its big-bank rivals to rebound fully from the crushing blow the stock suffered after the end of the housing boom in the mid-2000s.

Dividends are an area in which it has taken Bank of America even longer to recover. Yet with B of A having delivered a huge dividend increase earlier this year, investors are increasingly optimistic that future hikes are not only likely but inevitable. Below, we'll take a closer look at whether Bank of America will raise its dividend in 2017.

Dividend stats on Bank of America

Data source: Yahoo! Finance. Last increase refers to ex-dividend date.

The rise and fall of Bank of America's dividend

Many younger investors will be surprised to learn that Bank of America spent much of its history accumulating a sterling reputation as a dividend giant. The company became a Dividend Aristocrat in the early 2000s, maintaining that status until the onset of the pressures on the banking industry that eventually led to the financial crisis. B of A not only kept its dividend growing but also did so at a healthy clip, and the bank stock's dividend yield was often in the 4% to 5% range, making it fairly generous even among dividend-friendly financials.

The housing bust put an end to that dividend growth, and the bank quickly concluded that it needed to take steps to save as much of its free cash as possible. An early 50% dividend cut reflected hopes that B of A would be able to emerge from the crisis without more dramatic action, but the losses that stemmed from the snowballing crisis proved too large to support even that lower dividend.

BAC Dividend data by YCharts.

By the end of the crisis, Bank of America had cut its dividend to a token $0.01 per share, and it took years for the bank to get authorization to restore its quarterly payouts. The Fed denied a request from B of A to boost its dividend in 2011, and it took another three years before the bank was able to deliver a sizable increase to $0.05 per share. Since then, two subsequent boosts of 50% in 2016 and 60% in 2017 have helped make the bank's dividend more respectable. But it's still less than a fifth of what the payout was prior to the crisis, and the current yield of 1.6% is a disappointment to income investors.

Image source: Bank of America.

What's ahead for Bank of America's dividend in 2018?

What should be more worrying to investors is that Bank of America has signaled that restoring its dividend to its former glory isn't a top priority. CEO Brian Moynihan said after the most recent payout increase that the bank wanted to be cautious about the extent to which it increases its dividends so as to avoid the likelihood of ever subsequently having to cut them again. To keep regulators happy, Moynihan wants to keep Bank of America's payout ratio well below the perceived target of 30% of earnings.

That doesn't mean that B of A won't make a dividend increase in 2018, but expecting another 50% to 60% rise would require more earnings growth than is likely. A reasonable middle ground would be a 25% boost to $0.15 per share, which would put the dividend yield back above 2% while still keeping payout ratios around the 25% level. That level of boost to the dividend, along with more rounds of stock buybacks, could be the most likely outcome for Bank of America in 2018.