It's widely documented that over time, stock dividends provide a significant portion of the overall return on investment. Yet, the value creation assumes several implications. First, the shares are held long enough for the dividend to create meaningful value. Second, the dividend can be counted on for the foreseeable future.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

What Matters Most
Even if dividends create tremendous value over the long run, that reality means nothing to an investor if the underlying stock starts to decline significantly. Although a stock decline implies a higher dividend yield, in most cases such as an abnormally high yield, it will not last for long. Remember the dry bulk shipping industry? So, it's silly to chase dividends that are coming from unreliable companies. Instead, if one can find a company with strong prospects of maintaining and even increasing the dividend payout over time, there is a good chance that the company's stock price will also do well for investors over time. Believe it or not, today's banks may offer that opportunity of solid dividend payouts and growth potential.

Starting all over
Before the financial crisis hit in 2008, many of the largest financial institutions were considered consistent dividend payers, thanks to solid growth prospects. That idea came to a screeching halt when the credit markets froze and housing collapsed. Virtually all of the banks eliminated dividends as a way to preserve capital. As a result, those banks lost a wide base of investors who were rightfully concerned about the future solvency of the banks.

Fast forward to today and the picture is changing. Banks are cleaning up their balance sheets and capital ratios are vastly improved. Dividends have come back to some, while others are likely to reinstate the dividend as soon as regulations allow. In addition, bank shares remain at attractive valuations after a 50% drop in 2011. While 2012 has been a great rally so far for banks, the share prices in some cases do not fully reflect the tremendous progress. Going forward, banks have the opportunity to provide solid yields and stock price appreciation.

JP Morgan (NYSE:JPM) and Wells Fargo (NYSE:WFC) are good examples. After the recent round of stress tests, JPM announced another dividend increase along with a stock buybacks. Shares now trade for $45 and yield 2.7%. Last year, shares traded as low as $27.85 and buyers at that price are now picking up close to a 5% yield. Going forward, JPM will likely increase its yield again. Wells Fargo also yields 2.6% and Warren Buffett continues to buy the shares. When feasible, Wells Fargo will likely boost its dividend payout. For related reading, see The Kingpin Of Wall Street: J.P. Morgan.

One name ready to boost its dividend is Citigroup (NYSE:C). Citi currently pays out 4 cents and a negligible yield of 0.1% at today's share price of $37.70. But management realizes that its shareholders deserve a higher dividend, and as the company continues to improve its capital ratio, a dividend increase is expected. With shares trading at about 60% of book value, there is plenty of room for long-term share price appreciation. AIG (NYSE:AIG) is another large financial name that will one day start paying dividends. Shares trade at 50% of book and 10 times forward earnings.

In short, banks are starting all over again. They eliminated the dividends to shore up balance sheets and conserve capital. Going forward, bank executives are likely going to maintain a very cautious approach as to not risk a repeat of 2008. One of the best ways to illustrate that is by paying out dividends.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Stock Analysis

    Tech Stocks Vs. Financial Stocks in 2016

    Consider the arguments for allocating more of your investment portfolio to either the technology sector or the financial sector for 2016.
  6. Stock Analysis

    The Top 5 Financial Penny Stocks for 2016 (CPSS, ASRV)

    Learn about some of the most promising penny stocks in the financial services sector that investors can consider adding to their portfolio for 2016.
  7. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  8. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  9. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  10. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
RELATED FAQS
  1. How can insurance companies find out about DUIs and DWIs?

    An insurance company can find out about driving under the influence (DUI) or driving while intoxicated (DWI) charges against ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center