The U.S. Federal Reserve will make big headlines this week -- just not at Tuesday's meeting of its Open Market Committee. The Fed body that sets short-term interest rates is expected to leave rates just where they are at 0% to 0.25% and put a damper on whatever hopes for a third round of quantitative easing the financial market may still have.
In other words, business as usual Tuesday.
Thursday is a very different matter.
That's the day when the Federal Reserve is scheduled to announce the results of its annual stress test on U.S. banks. The Fed is expected to give the go-ahead for big dividend increases at banks that cut dividends after the Lehman bankruptcy. Those banks have been prohibited from reinstating dividends by new Fed requirements that they build up enough capital reserves to withstand another financial crisis.
Dividends at the 19 largest U.S. lenders will climb 30% this year from 2011, according to Wall Street estimates. The biggest jumps, analysts project, will occur at Wells Fargo
) and Citigroup
). Citigroup now pays a nominal one-cent a share quarterly dividend. Wells Fargo's current quarterly dividend is 12 cents a share for a yield of 1.75%.
Overall, estimates Barclays Capital, banks -- excluding investment banks such as Goldman Sachs
) and Morgan Stanley
) -- will raise payout ratios from 24% of earnings in 2011 to 48% of earnings in 2012. The dividend yield on the KBW Bank Index
) is now just 1.8%, about half the 2007 level.
What bank stocks should you look at? The following video has some ideas.
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The stress test asked banks to model their capital ratios if unemployment hit 13% and housing prices slumped another 20%.
Bank of America
) will be absent from any Fed announcement. After getting its request to raise its dividend rebuffed by the Fed in the last stress test, the bank didn't ask to raise its dividend or stock buyback in this round.
At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did not own shares of any stock mentioned in this post as of the end of December. 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.