Big banks have come a long way over the past decade, recovering fully from the financial crisis and regaining much of their former glory. One area in particular in which shareholders who stayed the course have seen a big recovery is in the dividends that major financial institutions pay. As banks like Bank of America (BAC 1.70%), Citigroup (C 2.82%), and Wells Fargo (WFC -0.26%) got more financially stable, they were in a position to return more of their capital to shareholders, and that has brought large dividend increases to investors in recent years.
Late last month, the Federal Reserve finished its evaluation of the capital plans that the banks under its supervision had submitted. In nearly all of those cases, the Fed approved those plans, and the increases that the three banks above plus Goldman Sachs (GS 1.59%), JPMorgan Chase (JPM 1.44%), and U.S. Bancorp (USB -0.20%) will make to their dividends will be sizable.
Data sources: Bank investor relations departments. Chart by author.
As impressive as Goldman's boost looks, it will only serve to pull up its current 1.65% dividend yield closer to the low end of the range for its peers. The other banks all paid dividend yields above 2% even before their raises, and Wells Fargo in particular was the highest of the bunch, with a yield approaching 4%.
Yet for major investors in bank stocks, the good news goes beyond dividends. Not only will shareholders get a nice boost in their income, but they'll also benefit from the massive stock repurchases that banks expect to make. Authorized buyback amounts range from $3 billion for U.S. Bancorp to $30 billion for Bank of America, which represents more than 10% of B of A's current market capitalization.
Skeptics will point out that all these repurchases coming after shares have rebounded from their financial crisis lows are just one more example of the bad timing that companies often have when it comes to buybacks. Nevertheless, at least for the moment, it's clear that the financial system is back on its feet, with the capital strength banks need to move forward aggressively and reward shareholders not just with buybacks but with cash from dividends as well.
