Now's the time to seek out bank dividends

The financial sector has performed very well, and some firms are increasing share buybacks while others are opting for a more shareholder-friendly solution.

By Jim J. Jubak Mar 18, 2013 11:14AM
Bank sign John Foxx Stockbyte Getty ImagesThe market's first take on the Federal Reserve's stress test of U.S. banks has been to divide bank stocks into "naughty" and "nice."

But I'd like to dive a little deeper and look at how banks that have been told by the Fed that they can pay out more on dividends or increase their share buyback programs have chosen to divide those payout streams. That's because I think investors get a lot more reward from a dividend increase than they do from a buyback. It makes sense, to my way of thinking, to go with the banks that emphasize dividends over buybacks -- all else being equal, of course.

The market's initial reaction to those banks such as Bank of America (BAC) that have received the Fed's stamp of approval on their capital plan for stock buybacks and/or dividend increases was to push their share prices higher Friday. Bank of America shares, for example, closed up 3.8%.

Banks that got a thumbs down from the Fed and will have to resubmit their plans closed down. BB&T (BBT), for example, finished off 2.36%. (It's hard to say that JPMorgan Chase (JPM) was down Friday because the Fed told the bank to improve its capital plan. The bank and CEO Jamie Dimon took heavy fire Thursday from a Senate report that ripped the bank's culture and risk controls in the London Whale trading debacle. JPMorgan Chase shares closed down 1.92% Friday.)

But the banks that got approval to increase their buybacks or dividends have put together very different mixes.

Some banks chose to increase their share buyback programs but not their dividends. Citigroup (C), for example, announced a new $1.2 billion program of share purchases but kept its dividend at a penny a share. That's not exactly a rousing vote of confidence by the bank's management in the bank's cash flow going forward. It's hard -- and very visible -- to cut a dividend once announced. It's much easier to announce a big buyback program and then to execute only a part of it if times turn tough. Bank of America was another bank announcing a big buyback -- $5 billion -- without a dividend increase.

Most of the banks that got the Fed's approval chose a mix of dividends and buybacks. Banks that wanted to send a message of confidence to shareholders seem to have picked an increase in the neighborhood to 20%. Wells Fargo (WFC) raised its dividend by 20%. U.S. Bancorp (USB) upped its dividend by 18%. Both banks also announced buybacks. (US Bancorp is a member of my Jubak's Picks portfolio.)

A very few banks went for all dividends. Capital One (COF) is the standout here. The bank announced a 500% increase to 30 cents from 5 cents.

The financial sector has been a clear leader in the rally to all time highs in the U.S. stock market. Right now I'd be looking at bank stocks where management is demonstrating a commitment to taking care of shareholders with higher dividend payouts.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. When in 2010 he started the mutual fund he manages, Jubak Global Equity Fund (JUBAX), he liquidated all his individual stock holdings and put the money into the fund. The fund may or may not own positions in any stock mentioned. The fund did not own shares of any company mentioned in this post as of the end of September. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here
3Comments
Mar 18, 2013 11:33AM
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I'm supposed to invest in banks while they're stealing 4-5% a year from me on my deposits after almost having ruined the whole country. No, I think I'll keep just enough in Wells Fargo to pay the bills and the rest in Fidelity and Schwab earning 4-5% from blue chip enterprises.  Bankers are pimps and crooks.
Mar 18, 2013 12:13PM
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I wouldn`t buy a bank stock if you paid me.These crooked bankers should be strung

up and face a firing squad.

Mar 18, 2013 12:22PM
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I keep as little money as possible in banks - It costs more money to keep your  money in them than you could ever make ! Why anyone would use banks to store money baffles me.  In fact it baffles me why people invest in them.
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