If you're looking for a stock you can trust to deliver not only solid dividend income but also excellent long-term returns, look no further than financial services giant JPMorgan Chase (JPM 0.19%). You won't find many stocks that are more stable and reliable than this one.
JPMorgan Chase is the largest bank in the U.S., but it is also a diversified financial services firm that has outperformed all of its big-bank peers over the past decade. Here's why it's a dividend stock you can trust.
JPMorgan: Building a fortress
JPMorgan Chase has been the best-performing bank over the past decade, and its leadership in the industry continues today by just about any measure. Over the past 10 years, JPMorgan Chase has increased revenue by 13% per year on an annualized basis, and its stock price has climbed 16% per year.
The company also held its value during the worst financial crisis in more than a decade. Last year, a terrible one for banks, JPMorgan Chase only saw a 5% decline in its stock price, outperforming its peers. This year, it's up about 24% year to date, which is about the average for the banking industry, and it's returned 58% over the past year.
There are a few reasons JPMorgan Chase stands out -- and a major one is its diversity of revenue. It is not only the largest commercial bank in the country, but it is also one of the top investment banks, and it has robust wholesale payments and trading and asset management arms. This allows the bank to generate revenue in all market cycles, as opposed to most banks, which are more cyclical.
When you look at some of the key metrics for banks, JPMorgan Chase comes out ahead. Its return on equity was 18% at the end of the second quarter, which is much higher than the 8% average for commercial banks. Further, its efficiency ratio is 58%, which is better than all of its major competitors (efficiency ratio expresses a bank's operating costs as a percentage of revenue; lower is better). JPMorgan is known for its "fortress balance sheet," which refers to the focus on efficiency, liquidity, and capital strength to enable it to weather difficult markets. It has a common equity tier 1 ratio of 13%, which is well above the minimum required by regulators, and more than $500 billion in cash to fortify itself against uncertainty -- including inflation.
"If you look at our balance sheet, we have $500 billion in cash, we've actually been effectively stockpiling more and more cash waiting for opportunities to invest at higher rates," CEO Jamie Dimon told CNBC back in June. "I do expect to see higher rates and more inflation, and we're prepared for that."
A dividend that's well protected
JPMorgan Chase's focus on its capital strength and a strong cash flow bodes well for its dividend. The company pays out a quarterly dividend of $0.90 per share at a yield of about 2.3% at Friday's prices -- which is higher than the average dividend yield on the S&P 500 (dividend yield is a company's annual payout divided by share price). It has consistently remained in that range for the past decade. It also has a very low and manageable payout ratio of 26%. It has increased its annual dividend for each of the past 10 years, averaging about a 16% increase per year over that time.
It has not yet increased its dividend this year, but on the second-quarter earnings call, CFO Jeremy Barnum said the board intends to increase the dividend to $1.00 per share. But Dimon added that the plan is to keep the payout ratio low. The idea is to have a dividend that is "sustainable through a bad downturn" but at the same time, Dimon said, "We don't want to raise the dividend so high that it cripples your ability to do other things."
As a market leader, JPMorgan Chase has the cash, earnings power, and stability to continue to invest it its growth and reward investors with a good dividend -- one they should be able to count on for years to come.