Many banks offer attractive dividends that are great for investors who like to focus on passive income. Companies that issue dividends are essentially taking part of their earnings and distributing that portion directly back to shareholders. Typically, dividends are distributed each quarter.
When evaluating a dividend stock, you want to look for dividends that offer a nice yield compared to other dividends and other investments, as well as dividends that are steady, sustainable, and growing. With that in mind, let's take a look at U.S. Bancorp (USB -1.11%) and see if it's a great dividend stock.
U.S. Bancorp is a super-regional bank based in Minnesota with more than $550 billion in total assets. Based on its share price on March 1 of roughly $51.24 and the bank's total dividend payments in 2020 of $1.68 per common share, the bank had a dividend yield of nearly 3.3% ($1.68/$51.24).
A dividend yield of 3.3% is pretty strong. The current dividend yield of the S&P 500 index, which is a good representation of the broader market, is about 1.5%, according to data from S&P Global Market Intelligence. The average dividend yield in the banking sector is currently a little over 2%, according to S&P Global Market Intelligence. U.S. Bancorp's dividend yield is also larger than the yield on safer investments like U.S. Treasury notes, with longer-duration notes currently yielding about 2.2%.
Dividend history and safety
Another way to evaluate a company's dividend is by looking at its history and seeing if a company has been able to sustain its dividend over a long period of time, and grow that dividend as well.
U.S. Bancorp cut its dividend in 2009 during the Great Recession, but has since grown its dividend every year since 2011. Its current annual dividend of $1.68 per share is nearly at the same level it was right before the Great Recession. Overall, this is very solid considering many bank dividends had to be cut during the crisis. U.S. Bancorp also managed to grow its dividend last year during the roughest part of the pandemic, which is quite impressive.
Another good thing to look at as it relates to bank dividends is regulatory capital. A bank must maintain a certain amount of capital in relation to its risk-weighted assets, so it can absorb unexpected loan losses and still be able to lend during an economic downturn. Banks' ability to pay out dividends and buy back stock is limited by regulatory capital requirements. One ratio that measures capital in relation to risk-weighted assets is called the common equity tier 1 (CET1) capital ratio. U.S. Bancorp currently has a CET1 ratio of 9.7%, while its regulatory requirement is 7%.
Without getting into the weeds, these numbers mean that U.S. Bancorp has billions of dollars in excess capital above its regulatory requirement. That's more than enough to cover its annual dividend payment if the bank's earnings happen to come up short one quarter or one year. The bank's equity capital is also replenished each quarter from a portion of the bank's earnings, so it's more likely to grow than decline as the bank continues to generate good profits.
Is it a great dividend stock?
Based on all of the criteria we have looked at here, I think it's safe to say that U.S. Bancorp is a great dividend stock. It's grown its dividend consistently for a decade now, and its dividend yield surpasses that of the S&P 500 and the average bank dividend yield. U.S. Bancorp is also in great shape in terms of its regulatory capital position, so definitely consider buying this stock if you like dividends.