Please ensure Javascript is enabled for purposes of website accessibility

How Could Bigger Dividends Change the Game for Bank of America Stock?

By Anders Bylund - Apr 15, 2013 at 2:05PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The megabank had its dividend options limited by regulators in 2008, but the government recently eased those restrictions. Will Bank of America stock ever become an income-generating powerhouse again?

Bank of America (BAC -1.23%) suffered more than most megabanks in the financial meltdown of 2008. Its dividend policies have been under a heavy regulatory thumb ever since, but the government recently eased those restrictions a bit. Will Bank of America stock ever become an income-generating powerhouse again?

The mortgage-fueled crisis of 2008 took a heavy toll on Bank of America's investors, and the loss of a stellar dividend policy played a major part. Leading up to the meltdown, the stock had provided a yield north of 3.5% since the end of 2003, and the yield has rarely approached 1% since that adjustment. These dramatically reduced payouts shocked investors stiff.

BAC Dividend Chart

BAC Dividend data by YCharts.

Bank of America finally aced the government's financial stress tests and was given a nod of approval for its capital plans. However, these plans did not include any kind of immediate dividend increase. Instead, the bank will put $5 billion into share buybacks and another $5.5 billion into preferred-share redemptions.

But a dividend boost was certainly on the table. Some of Bank of America's large rivals asked for, and received, such approvals with similar stress-test results in hand. What would $10 billion of additional dividend spending have done for the bank's shareholders?

It would have been a substantial boon indeed. The company funneled a total of $1.9 billion into dividends over the last year, so adding $10.5 billion to that shareholder-friendly line would have multiplied the payout by 5.5. At current share prices, that would work out to a 1.7% yield.

That's far from the consistent 3.5% yields of a decade ago and still well below the average yield of Dow Jones (^DJI -0.75%) components. But an increase like that would also be a vote of confidence in the bank's fundamentals, and income investors would come looking for signs of future increases. Keep in mind that fellow Dow member JPMorgan Chase (JPM -1.48%) also saw its dividend cut to ankle-high levels but now offers a decent 3.1% yield. JPMorgan has crushed the Dow in the long run, largely thanks to its resurgent dividends.

Like JPMorgan's, Bank of America's shares should see a healthy boost if and when the bank's management makes a firm commitment to dividend payouts again. That's when the bank stock truly takes back its status as a driver of Dow value, rather than a drag on the index.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$31,253.13 (-0.75%) $-236.94
Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$34.45 (-1.23%) $0.43
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$118.31 (-1.48%) $-1.78

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
327%
 
S&P 500 Returns
116%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/20/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.