Looking for Double-Digit Dividend Growth? Try This Sector

By Markets Fool.com

If you're looking for a stock that will rapidly increase its dividend payout this year, then the financial sector is the place to start your search.

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Dividends have grown considerably over the past year across the board. According to a new report issued by FactSet Research Systems, dividends per share for the S&P 500 increased by 11.9% over the last 12 months alone.

The consumer discretionary sector led the way with a 19% boost in the size of the sector's combined dividend per share. All told, six of the 10 sectors reported double-digit dividend increases in 2014.

But while consumer discretionary stocks ruled last year, analysts believe the financial sector will lead the charge over the next 12 months.

Overall, dividends per share for S&P 500 companies are projected to increase by 8.2% this year. That's impressive, but it's markedly lower than last year's growth. One reason dividend growth is projected to decrease is that fewer sectors are likely to report double-digit increases. In fact, only two sectors are expected to do so: financial and industrial stocks.

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If analysts are right, then the financial sector will see dividends grow by 12.8% this year. Industrial stocks come in second with an expected 10% increase in dividends per share.

The principal reason financial stocks are likely to take the lead this year is that they're still recovering from the financial crisis. Prior to Lehman Brothers' bankruptcy in September 2008, many of the nation's largest banks were also some of the market's biggest dividend payers. But that came to a halt with the onset of the crisis.

Bank of America and Citigroup serve as cases in point. In 2006, the companies paid $9.7 billion and $9.8 billion in dividends, respectively. By 2009, those figures were cut to $4.9 billion and $3.2 billion, respectively, in order to preserve capital that could be used to absorb tens of billions of dollars' worth of losses.

BAC Dividend Chart

Since then, these same banks and others have been stymied in their efforts to increase their quarterly payouts. This is because new legislation passed in the wake of the crisis gives the Federal Reserve veto power over the capital plans of banks with more than $50 billion in assets on their balance sheets.

Over the past four years, for instance, the central bank rejected two of Citigroup's proposals to increase its payout. In fact, it didn't get the go-ahead to do so until last week, when the nation's third-largest bank by assets announced that it would boost its quarterly distribution from $0.01 per share to $0.05 per share.

The net result is that financial stocks still have a lot of catching up to do. And that catching up could be a boon for dividend investors.

If you're looking for a place to start, the best bet is to stick with top-shelf lenders like Wells Fargo and U.S. Bancorp, which have two of the lowest efficiency ratios in the industry, as well as long histories of prudent risk management -- the two principal qualities of great bank stocks. While neither is cheap from a valuation standpoint, trading at or near two times book value, they can be trusted to survive future cataclysms.

On top of this, according to past statements by their executives, both of these banks are committed to returning an ever-increasing amount of capital to shareholders. Earlier this month, for instance, Wells Fargo and U.S. Bancorp boosted their quarterly payouts by 7% and 4%, respectively. And with payout ratios still in the low-30% range, they have plenty of room to return a greater share of their earnings in the future.

The article Looking for Double-Digit Dividend Growth? Try This Sector originally appeared on Fool.com.

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc, and Wells Fargo and has the following options: short April 2015 $57 calls on Wells Fargo and short April 2015 $52 puts on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.