For many investors, there's just not enough room in the investment portfolio for two high-profile bank stock dividend plays. That means you have some hard choices narrowing down your options to the bank stock that's perfect for your income needs.
To help you make the right pick, we've organized and promoted this dividend stock battle royale, pitting megabank Bank of America (NYSE:BAC) against New York Community Bancorp (NYSE:NYCB), the regional New York City specialist.
The tale of the tape: Bank of America
In the red corner, we have Bank of America. The bank has struggled mightily since the financial crisis, bleeding money from regulatory fines, Justice Department legal settlements, and a huge portfolio of troubled loans.
But lately Bank of America has managed to turn the corner, and seems to be making a case for comeback bank of the decade. Management has corralled those problem loans, all the legacy legal problems from the financial crisis are in the rear view mirror, and the bank crushed earnings expectations in the second quarter posting $0.45 per share.
Bank of America today is simpler, slimmer, and more focused than it was in the era preceding the financial crisis. CEO Brian Moynihan boasted of the bank's "solid core loan growth, higher mortgage originations and the lowest expenses since 2008" in the quarter.
With the overall risk profile of a bank on the decline, profits on the rise, and the U.S. economy continuing to improve, it stands to reason that Bank of America should be very well positioned to expand its dividend, which currently yields 1.1%.
Tale of the tape: New York Community Bancorp
In the other corner, New York Community Bancorp has a whole different set of opportunities and risks.
Bank of America is about 45 times larger than New York Community Bancorp in terms of total assets as of June 30, 2015. But in terms of dividend yield, it's the smaller bank that pumps out the out-sized yields. New York Community Bancorp's dividend currently yields 5.4%, 4.9 times the yield of B of A.
New York Community Bancorp specializes in lending for apartment buildings in rent controlled areas of New York City. That means these buildings have very high occupancy rates and very steady cash flow. That also means that the loans financing those buildings get paid on time, nearly every time. For a bank, that's an incredible business model.
The problem is that the bank has grown to $48 billion in total assets, which puts it just under the very significant regulatory threshold of $50 billion. Crossing that line means considerably higher regulatory scrutiny and higher expenses. Instead of crossing that bridge steadily with organic growth, the bank chose to slam the brakes on and wait for an opportunity to leap frog the $50 billion threshold.
For the past few years, that translated into a very high dividend payout ratio, which has maintained the exceptional dividend yield, currently at 90.4% on a trailing twelve month basis.
However, when the bank's management does pull the trigger to leap frog $50 billion, it's quite likely that the dividend payout ratio will be forced to come back to Earth, bringing the yield with it. The reason is that the bank will be forced to maintain more capital on its books to support the immediate growth from acquisitions and the organic growth to follow. Adding capital quickly usually means cutting a dividend and keeping that cash on the balance sheet instead of returning it to shareholders.
In the specific case of New York Community Bancorp, it almost certainly means cutting that rich dividend payout ratio.
And the winner is...
So, the choice still isn't clear. Bank of America is a mega bank, and has all the problems that come with being a mega bank. Its dividend yield is also paltry in comparison to New York Community Bancorp's 5.4%. But B of A does appear to be on the rise, with dividend hikes a reasonable expectation with every passing quarter and year.
New York Community Bancorp, on the other hand, is clearly the leader at this moment, but the future of the dividend is cloudy. At the same time, though, even with a large dividend cut it's not unrealistic that the bank's core apartment lending business could support a dividend larger and more stable than B of A's.
In my view, Bank of America still has too much left to prove to recommend it as the winner in this dividend stock battle. Yes, the bank has done a great job recently in its efforts to turn things around -- but the bull market and growing U.S. economy could be confounding factors in the bank's success. Did Bank of America pull through because of outside conditions or because it has actually made the changes it needs?
Until B of A can prove that its culture and management can guide the bank successfully through a recession or tightening credit cycle, then I can not in good conscious recommend B of A.
So there you have it: the winner in my opinion is New York Community Bancorp. I do think the bank will be forced to cut its dividend in the relatively near future, but even after that I think New York Community Bancorp will represent a better dividend buy than B of A.
Jay Jenkins has no position in any stocks mentioned. The Motley Fool recommends Bank of America. 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.