Bank Dividend: Will It Grow?



This is where banks are truly beautiful businesses for income investors. A core growth rate of 6 percent isn ’ t likely to attract many growth - oriented types, but when you throw in the effect of share repurchases (which boosts BB & T ’ s dividend growth rate 2 percent annually) and an up - front dividend yield of 4 percent, BB & T looks poised to deliver annual total returns of 12 percent. Running some different scenarios for growth and profitability, I find that even a disappointing set of inputs (20 percent ROE and 4 percent core growth) should still provide BB & T shareholders with a 10.3 percent total return. At the other end of the spectrum (8 percent core growth and a 30 percent ROE), BB & T would offer a gangbuster return prospect of 13.8 percent.

Return prospects on this order are not at all uncommon as of this writing, a handsome return prospect by any measure. But while my basic hurdle rate for a stock yielding 4 percent is only 9 percent (see Chapter 8 ), I tend to require a little more from banks — no less than 10 percent, and that ’ s only for the most predictable dividend growers. If you find a total return prospect below 10 percent, I can all but guarantee there ’ s a better bank out there to buy.

Bottom Line: Banks Banks may not be the first place most investors look for income. From where I write today, banks are still thought of as cyclical plays on interest rates, and right now, that interest rate cycle isn ’ t at all favorable for near - term earnings growth. But in the past couple of years, many banks have raised their dividend rates and payout ratios substantially, even as their share prices have in the aggregate made relatively little progress. One day, I think even Mr. Market will wake up and realize that a bank ’ s total return prospect isn ’ t just about earnings growth and capital appreciation anymore; the yields are just too good to ignore.

I ’ ll wrap up this appendix with a list of some of my favorite banks. Not all are worth buying at the prices offered at any particular moment, but these all combine low - risk business strategies with high profitability and good dividend growth prospects.