Banks to Increase Dividends. Financial Stocks to Benefit Include JPM, BAC, WFC, GS, USB, STT and BNY

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The Federal Reserve will soon allow banks with strong enough capital cushions to raise dividends, making them much more attractive to local and foreign investors. Only banks that satisfy new capital requirements from global regulators (Basel III) and domestic regulators (Dodd-Frank), will be able to raise dividends.  The potential for a significantly increase dividend payout  has already boosted the prices of some bank stock prices, and here is a list of banks that are likely to benefit the most from the easing of dividend restrictions:

While the banks were waiting for the green light to restore their payouts, other companies have been boosting dividends in recent months, making their shares more attractive, especially given the slow growth in the economy. Financials on average yielded 4.4% in 2008, making them one of the highest-yielding sectors, according to Standard & Poor’s. Now they yield 1.1%, making them the second-lowest yielding sector in the market. The six largest U.S. banks currently pay quarterly dividends totaling 51 cents, down from $2.49 in 2007. Bloomberg dividend forecasts show JP Morgan will quadruple its quarterly payout to 20 cents in February, while Wells Fargo will double its to 10 cents in April 2010.

JP Morgan and Chase (JPM),  Up almost 8% over the last week, this is strongest of the banks around and Chief Executive Jamie Dimon has already announced his intentions to start raising dividends from Q1 2011. He has said on many occasions that he did not even want TARP money, and he wants to pay dividends as soon as soon as the regulatory hold is released.  JPM’s current dividend is only $0.05 per quarter, compared $0.38 per quarter in 2008, though it may take a while to return to those levels. With EPS projections of over $4.50 in 2011 and a solid capital base, JPM is the pick of the bank stocks from both a dividend and capital growth perspective.

Bank of America (BAC) is the largest of the banks by deposits, and it too has signaled that it will look to increase dividend payouts; albeit at a lower-income payout ratio than historic levels.  The bank’s common stock now only pays $0.01 per quarter for a 0.33% annualized dividend yield, down from a high of $0.64 before the financial crisis hit.  Based on forecast earnings BAC could easily pay a dividend of up to  $0.12 per quarter, which is a dividend yield of 4% at current prices.

$2.95 Flat-Rate Stock Trades @ OptionsHouse.comWells Fargo & Co (WFC) will also likely return to dividend payments after Chief Financial Officer Howard Atkins, 59, said last month that an increase is a “top priority” for the bank.  The current dividend yield is only around 0.75%, down from a peak of about 4% before the financial meltdown and the Wachovia takeover. Analysts expect JPM and WFC to be the first of the mega-banks to raise dividends substantially in 2011.

Goldman Sachs (GS) and  Morgan Stanley (MS)- Amongst the first banks to pay off  TARP funds, both these bank holding companies that have no real bank are keen to return capital to investors and could easily triple current payouts to yield over 3% in 2011. With the strong M&A deal flow expected next year, these investment banks are poised to provide a solid combination of capital and dividend growth.

Other solid, safe and stable bank stocks worth considering that should pass the Fed tests to allow dividend payments are : US Bancorp (USB), State Street Corp (STT). and Bank of New York Mellon Corp (BNY). All these stocks could easily triple or quadruple their current dividend yields next year. If you don’t want to buy individual stocks then consider low cost Financial ETFs like XLF, UYG and KBE which hold a number of these quality banking stocks in their funds.

The following banks are not expected to boost their payouts: Citigroup Inc., First Horizon National Corp., Fifth Third Bancorp, KeyCorp, Marshall & Ilsley Corp., Regions Financial Corp., SunTrust Banks Inc. and Zions Bancorporation.

Allowing banks to beef up their dividends would offset a slow down of capital gains in a slow-growth macro environment, which is bound to lure investors back to high quality dividend paying bank shares. So if you do not have some of the above bank stocks in your stock portfolio, now is the time to starting adding them.

References : WSJ , 24/7wallst, Bloomberg, DowJones

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{ 7 comments… read them below or add one }

Janet January 1, 2011 at 10:45 am

They need to cut interest rates instead of just worrying about dividends. Why not just levy a fee for missed payments or going over the limit? Why do they insist on raising rates for a missed payment? If someone cannot make a payment, will it get any better if the interest rate is raised? Do the banks think at all about their customers? Who can pay 28%? I don’t care what the agreements say – that is not moral.

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WalkWild November 14, 2010 at 10:25 pm

Bank of America will be in no position to pay a dividend thanks to it’s Countrywide Financial purchase in 2008. It (and it’s shareholders) will be paying for that bad purchase for a long time to come. Go with JPM And WFC for the big banks likely to pay a dividend.

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Gerald November 8, 2010 at 10:21 am

Hmmm….banks stocks are down today. Clearly the Euro debt and macro-economic issues have a bigger impact on bank stock prices than a dividend increase. So before investing consider ALL factors. Mind you, the 401K plans will look better with dividend increases over the longer term.

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Gail November 7, 2010 at 6:18 pm

Money times are back courtesy the US taxpayer. Thank you uncle SAM for making the rich, richer while 10% of us are unemployed and 80% of us are underpaid.

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David November 7, 2010 at 6:12 pm

Obama’s Bank Welfare program is in full swing, operation fatten the Banking Fat Cats is fully underway!

Heck with the average Joe, they never count in the circles of power! The power is being concentrated, which is a danger sign for democracy and capitalism… Ben is going to undermine the sense of fair play we all take for granted in our market, this is a dangerous move, coups can be staged when these types of things happen….

Ben has chosen a side, it is not with the electorate, it is with the big banks, the system insiders, Obama is going to regret this decision, the seeds of this miscalculations are going to take place months from now, when it will be too late to reverse course, the damage will be done.

if the FED goes forward with this payoff of the banks and inflating the money supply, the social unrest when average folks realize what happened to their savings is going to cause a huge rift in society, this will be a bridge too far, it may be unrecoverable for Obama, it is under his watch and it is his appointment that is doing this. You can multiple the anger you just saw at the ballot box.

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Vinnie November 8, 2011 at 8:02 am

You’ve got to be kidding me—it’s so tarnsparetlny clear now!

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Laurel November 7, 2010 at 6:10 pm

Anyone with any extra money at all should shovel it into the financial sector ASAP. In fact the lowest cost best growth potential stock is by far Big C. You’d be best advised to purchase as much as possible. As for trader’s all I can say is Wow what easy Pickens’s. And for you options trader’s Ha ha..it’s time you fellows “suck on hollow eggs.” Grow some balls and trade equities direct it’s more fun and the vigor is lower.

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