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Dividend Investing Ideas Center
Shauna O'Brien Dec 22, 2014
Before the financial crisis in 2008, many dividend investors flocked to bank stocks for their attractive dividend yields and stability. Since many of these companies paid such attractive and consistent dividends, and appeared to be large stable companies, investors believed that their investments in bank stocks were safe.
However, when the financial crisis hit and banks began to fail and government bailouts started to occur, investors quickly saw how the ensuing TARP bailouts were definitely not friendly for dividend investors. During this time, many of these dividend yields surged as the share prices fell. This created a dividend trap for some investors.
During the years prior to the 2008 crisis, JP Morgan (JPM ) offered a dividend yield around 3%. By 2008, as JPM’s share price began to crumble, its yield rose above 4%. By February of 2009, JPM’s yield dropped to just 0.55% when the company cut its dividend for the first time since 1990 from 38 cents to 5 cents per share quarterly. This drastic change came as a surprise to many investors. Although many banks had recently slashed dividends, JPM was still considered one of the most stable investment banks, and was one of the last to cut its payout.
This dividend reduction came soon after the company received $25 billion in TARP bailout funds. JPM’s CEO Jamie Dimon reported that the cut was unrelated to the bailout, and said that this cut was made to allow JPM to have more financial flexibility. The 87% dividend cut helped the bank save $5 billion annually, which freed up capital to repay bailout funds.
However, unlike banks like Citigroup and Bank of America, which have shown no sign of a dividend yield recovery, JPM has raised its dividend four times since 2010 and now offers a 40 cent per-share quarterly dividend again.
The New York City based bank now offers a 2.6% dividend yield. The company may still be recovering from the financial crisis, but its dividend yield has made great progress compared to many of its peers.
By 2014, JP Morgan has been fined about $34 billion for wrong doings related to the financial crisis. For more information, check out A Brief History of JP Morgan’s Massive Fines.
San Francisco-based Wells Fargo (WFC ) kept up with its peers by offering over a 3% dividend yield in 2006 and 2007. In 2008, WFC’s yield shot up to 4.5% as its share price fell, similar to other banks at the time.
Just two months after the bank’s purchase of ailing Wachovia in March 2009, the bank cut its dividend 85% from 34 cents to just 5 cents per share, leaving shareholders with a mere 0.70% yield. The cut allowed WFC to save $5 billion a year to help fund its toxic mortgage losses.
The company’s yield remained below 1% in 2010, but it began to rebound by 2011.
These two banks are certainly still dealing with the overall process of recovering, but as far as dividend yield goes, they both have made a decent recovery. On the downside, there are several banks including Bank of America and Citigroup that have yet to offer a decent yield despite their recovering stock prices.
Charlotte, NC-based Bank of America (BAC ) traded at around $50 prior to the 2008 crisis, and had a dividend yield that exceeded 5% in 2007 and reached 7% by 2008. The banking giant was historically a great choice for dividend investors, but that all changed in 2009 when the bank was forced to cut its dividend in order to comply with government restrictions after taking TARP bailout funds.
In 2009, BAC cut its quarterly dividend to just 1 cent per share. This left investors with just a 0.23% dividend yield. Since the dividend cut, BAC has made attempts to raise its dividend, but has failed to gain government approval.
The company’s stock price has made some recovery since the financial crisis. In 2014, the bank finally boosted its dividend from 1 cent to 5 cents per quarter. For more information, check out these 11 companies that experienced a dividend disaster.
In 2006, Citigroup (C ) had a dividend yield of about 4% which increased to over 4.5% in 2007. By 2008, the New York City-based bank had a dividend yield of over 7% as its stock price began to fall. In 2008, Citi was bailed out by the U.S. government for the first time and given $25 billion in TARP bailout funds. By February 2009, Citi had received its third government bailout. The government owned one-third of its shares.
To comply with the government regulations, the bank suspended its dividend entirely from 2009-2010. In March 2011, the company resumed its dividend, offering a yield of just 0.10%, or 1 cent per share. During this time, C also did a reverse stock split of 10 to 1, making its shares worth approximately $44.
Citi’s stock price has seen some split-adjusted upside since the crisis, but its dividend yield has yet to recover. The company currently offers a minuscule dividend yield of 0.08%.
Several years after the crisis began, many big-name banks have yet to fully recover, with dividend payouts in the sector still near historical lows. These four banks are just a small sample of all the banks that had to cut their dividend during the financial crisis. While banks like PNC Financial Services (PNC ), which has pulled its yield up to 2% from just 0.80% in 2009, have shown somewhat of a dividend yield recovery, banks including Morgan Stanley (MS ) and SunTrust Banks (STI ) have yet to reclaim decent yields (both still offer yields well below 2%).
The financial industry continues to recover, but for some banks there is no immediate dividend increase in sight. These banks continue to compete in a tough market and their dividends will likely need some time to fully recover to pre-2008 conditions. High dividend bank stocks may be a thing of the past.
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