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Is Citigroup a Great Dividend Stock?

By Bram Berkowitz - Updated Mar 7, 2021 at 9:56AM

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The bank has grown its dividend significantly in recent years, but is it truly great?

Dividends are a big consideration for many investors. Companies that issue dividends, which are typically distributed each quarter, are essentially taking part of their earnings and giving that portion directly back to shareholders. The banking sector is known for producing some attractive dividend yields that are great for investors who like to focus on passive income.

When evaluating a dividend stock, you want to look for dividends that offer a nice yield compared to other dividends and investments, as well as dividends that are steady, sustainable, and growing. With that in mind, let's take a look at Citigroup (C -0.06%) and see if it's a great dividend stock.

Citigroup's dividend yield

Citigroup is currently the third-largest bank in the U.S. with more than $2.2 trillion in total assets. Based on the bank's recent share price on March 5 of roughly $70 per share, and the bank's total dividend payments in 2020 of $2.04 per common share, Citigroup had a dividend yield of nearly 3%. Shares of Citigroup are trading lower than they did prior to the pandemic, and below tangible book value, so its dividend yield is a little higher than what it would be if the bank was valued more like the rest of the sector.

The inside of a Citigroup branch.

Image source: Citigroup.

dividend yield of 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.

A growing dividend with safety 

Citigroup was one of the hardest-hit big banks during the Great Recession. As a result, the company slashed its quarterly dividend down to a penny a share, which is where it remained until 2015. Since then, Citigroup has grown its dividend fairly significantly to its current quarterly dividend of $0.51 per share. The company didn't grow the dividend in 2020, but maintained its current one, which is solid considering the global pandemic it has had to deal with.

When examining bank dividends, another thing to look at 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. Citigroup currently has a CET1 ratio of 11.8%, while its regulatory requirement is 10%. 

It may not sound like a lot of room, but this means that Citigroup has tens of 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 even 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 profits.

Is it a great dividend stock?

Although Citigroup currently has a 3% dividend yield, I would categorize it as a good but not yet great dividend stock. The reasoning behind this is that Citigroup currently trades at a much lower valuation than the rest of the banking sector, making its current dividend yield look better than it really is.

Still, even if the stock did have a higher valuation, its dividend yield would still likely exceed the average dividend yield of the banking sector and S&P 500. Also, with good dividend growth in recent years and lots of excess capital, this seems like a dividend that can continue to grow and soon turn into a great dividend stock in the near future. Currently trading below tangible book value, Citigroup stock presents a good investment opportunity.

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Citigroup Inc.
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