Banks Given Go Ahead To Pay More Dividends

As anticipated by many analysts and financial executives, the Federal Reserve has given numerous financial firms the green light to increase dividend payouts. Dividends were cut or suspended in 2009 after the financial crisis. After several rounds of stress tests and indications from many of the larger financial institutions that troubled assets are declining, the Fed declared that capital ratios are now adequate enough to allow for greater payouts.

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No Blank Checks
The Feds approval is not a blank check, however. For the most part, banks will be restricted to paying no more than 20% to 30% of their earnings in dividends. While some of the better run banks could easily payout more, dividends payouts will increase dramatically from the trickle rate that they have been. As expected, JP Morgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) are increasing payouts significantly. JP Morgan dividend will go up from 5 cents to 25 cents a share - a far cry from the dividend payout level pre financial crisis - but a nice jump for investors. In addition JPM will buyback $15 billion in stock. (For more, see Great Dividend Yield Payouts.)

Wells Fargo is also going to increase its dividend from 20 cents a year to what appears to be 48 cents a year as the company increased its quarterly payout to 12 cents upon receiving approval from the Fed. In addition the bank plans to buy back 200 million shares.

Signs of Hope
Hoping to show investors confidence, Citigroup (NYSE:C) also announced a dividend payout of 1 cent a share. From a payout perspective this dividend is insignificant to investors. However, Citigroup was widely considered one of the most troubled financial institutions even today. The fact that it is able to pay a penny a share on 29 billion shares outstanding is not insignificant, however. Citigroup also announced a one for 10 reverse stock split. While stock splits merely change the number of slices in the pie, Citi shares will get attention when they go from $4.50 a share to $45 a share: most mutual funds are restricted from owning shares that trade below $10 a share. (For more, see What Are Reverse Stock Splits?)

Not all banks will be increasing dividends. Most notably, Bank of America (NYSE:BAC) will wait to increase its dividend. As the bank still works through its foreclosures and troubled loans, BAC did not ask the Fed for approval but opted instead to wait until the second half of the year. That may not please investors today, but in the long run, BAC is doing the smart thing by first getting its house in order.

Bottom Line
While the announced dividend increases are in most cases well below the levels in 2007 and 2008, this is clearly a step in the right direction. If bank earnings continue to improve over the next couple of years, dividend payouts could continue increasing for patient investors. (For more, see The Power Of Dividend Growth.)

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