For years, Bank of America (NYSE:BAC) was a dividend dynamo, increasing its payouts annually from 1990 through 2008, and usually yielding better than 3% of the stock price:
However, the financial crisis hit, and this happened:
Bank of America went from a cash flow machine that paid out more than $2.50 per share in annual dividends at its peak, to paying only $0.20 per share annually today. While the company will eventually put its ills behind it, income seekers are probably better off looking elsewhere. With that in mind, let's look at three companies with stocks that represent better sources of dividend growth both now and into the future.
Warren Buffett's favorite bank
Wells Fargo (NYSE:WFC) came through the financial crisis much better than essentially all of its megabank peers, and actually pays a higher dividend today than it did before the recession:
Buying shares today would net investors roughly a 2.7% dividend yield. That might not be the kind of income many are looking for, but here's what makes Wells Fargo a better dividend stock than BofA today: dividend growth.
Let's say you bought shares of Wells Fargo in early 2012 for about $30. Over the past 12 months, the company has paid out $1.50 per share in dividends. That means your original $30 share price would net you a 5% yield based on the current dividend. Best yet, the current dividend is more than sustainable:
What does that mean? In short, the payout ratio is the percentage of profit the company pays in dividends. That 55% is very reasonable, and well within the company's target range.
If you're looking to own a big bank, Wells is a better bet than Bank of America -- especially for dividend seekers.
Nothing better than predictable income for predictable dividends
Safety Insurance Group (NASDAQ:SAFT) might not have the scale and size that helps make Wells Fargo such an impenetrable fortress, but this small Massachusetts-based auto and home insurer operates a solid business in a state with regulations that keep many would-be competitors out. Furthermore, Safety Insurance has a long history of profitable underwriting, which isn't the norm for many insurance companies. The typical insurer will often take a small loss on its insurance business while making money on its investment of the "float" -- the premiums that it collects and invests.
The biggest risk with Safety Insurance? Sustained low interest rates. The company must protect against downside losses in its investments, which usually means bonds or other fixed-rate instruments. Right now, the returns remain far below historical averages. This dragged on earnings last quarter, when returns on investments reduced net income, even though premiums rose for the year and quarter. The company's history of consistent underwriting profit helps reduce the impact of low interest rates, but it's still a risk investors should be aware of.
Today the stock yields 4.7%, and the company has managed to grow or hold the dividend steady every year for the past decade:
As you can see, that's a significantly better result than larger peers Allstate and Progressive.
Don't need income today? This company could pay you huge income in coming years
Many investors might not be counting on dividends for income today, but instead are building a portfolio based on future dividends. American Express (NYSE:AXP) could be a great choice if that's your situation. The yield today is a paltry 1%, but the big opportunity here is in AmEx's ability to grow that dividend over the next 10 or 20 years.
Here's some context for the opportunity: If you bought shares of American Express in 1991, you would have paid about $6 per share, and you would have collected $1.01 per share in dividends over the past year if you'd kept the stock. That's good for an almost 17% annual yield on your original investment.
When you have decades to let your investments grow their income and cash flow, the power of dividend growth can be worth a lot more than hunting for dividend stocks in or near retirement.
Yes: American Express has some business issues to deal with after losing its partnership with Costco, which has been worth as much as 20% of its business. There's also risk of additional lost business following its loss in a lawsuit with merchants who called foul on some of the company's contract provisions. However, as fellow Fool Dan Caplinger wrote, American Express remains the premium card, and that gives it leverage with merchants that want to be sure American Express's high-end cardholders continue to shop at their stores.
In the long run, another billion people are expected to join the global middle class over the next couple decades, and a significant number of them will become prototypical AmEx card carriers. Factor in the global shift away from cash transactions -- still used in far and above the lion's share of such transactions today -- and American Express' best dividend growth days might still be ahead.
Looking long term
Bank of America is still dealing with lingering legal issues and lawsuits tied to its mortgage business, and that creates risk and limits its ability to pay a larger dividend. Over time the company should move beyond those issues, as well as establishing levels of Tier 1 capital that allow it to increase its payout. However, there are many more potential risks -- as I see it today -- than possible upside for the stock and its dividend.
Depending on your dividend needs today, one of the companies above should be a better and more reliable dividend investment than Bank of America.
Jason Hall owns shares of American Express, Apple, Costco Wholesale, Safety Insurance Group, and Wells Fargo. The Motley Fool recommends American Express, Apple, Bank of America, Costco Wholesale, Progressive, Safety Insurance Group, and Wells Fargo. The Motley Fool owns shares of Apple, Bank of America, Costco Wholesale, and Wells Fargo and has the following options: short April 2015 $57 calls on Wells Fargo and short April 2015 $52 puts on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.