Which Bank Has the Best Dividend Stock?

By Dan Caplinger Markets Fool.com

Before the financial crisis, the banking industry was a favorite place for dividend investors. The market panic in 2008 brought the financial sector to its knees, and most major banks slashed their dividends in its wake. Yet in the years since then, most banks have rebounded sharply, and dividend restoration has been a big part of their success. Income investors want to know which of the big banks has the best dividend stock, and so we'll compare them based on several measures to see which looks most attractive.

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Which bank has the best dividend yield?

From an objective standpoint, comparing bank stocks based on yields couldn't be easier. Here's how the top seven banks stand up:

Bank

Current Dividend Yield

Wells Fargo (NYSE: WFC)

2.6%

JPMorgan Chase (NYSE: JPM)

2.1%

US Bancorp (NYSE: USB)

2%

Morgan Stanley (NYSE: MS)

1.7%

Bank of America (NYSE: BAC)

1.2%

Citigroup (NYSE: C)

1.1%

Goldman Sachs (NYSE: GS)

1%

Data source: Yahoo! Finance.

Wells Fargo comes in with the highest yield. However, at least part of that performance results from the fact that Wells Fargo has taken least advantage of the boom in financial stocks over the past year. Even as giants like JPMorgan Chase and Goldman Sachs have jumped 60% to 70% and Bank of America has close to doubled, Wells Fargo's relatively modest rise of about 25% has come in the wake of its fake account opening scandal. Because the stock hasn't risen as much, the downward pressure on the dividend yield hasn't been as great, allowing Wells Fargo to take the lead. Wells clearly leads on this measure, but for those who already own the stock, the Pyrrhic victory on the yield front hasn't won them the total-return war.

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Image source: Getty Images.

Dividend growth

Current yield is one important aspect of dividends, but it's also vital for a company to show the ability to boost its dividend payments regularly over the years. That way, long-term investors can maximize the amount of income they receive over a long time horizon.

There have been big disparities among the bank stocks with respect to dividend growth since the financial crisis:

Bank

Number of Dividend Increases Since 2009

% Increase in Dividend, Past 5 Years

Wells Fargo

8

217%

JPMorgan Chase

6

92%

US Bancorp

6

124%

Goldman Sachs

5

86%

Morgan Stanley

3

300%

Citigroup

2

1,500%

Bank of America

2

650%

Data source: Yahoo! Finance.

It's challenging to interpret the data here, in part because the baseline measures differ so much. For instance, alone of all of these stocks, Goldman Sachs didn't suffer a dividend decrease during the financial crisis. The bank didn't pay that much before the crisis, though, making it less than an ideal dividend stock from an income perspective. Yet Goldman's stability penalizes it with the lowest percentage increase of the group, largely because others climbed from lower starting points. By contrast, both Citigroup and Bank of America saw their dividends drop to just $0.01 per share on a quarterly basis, so their high percentage increases aren't as impressive as they appear.

However, it is telling that the top three yielding stocks have also made the largest number of dividend increases since the financial crisis. That gives Wells, JPMorgan, and US Bancorp a leg up on the competition.

Dividend sustainability

You can't just pay a dividend. You also have to be able to keep paying it. The earnings payout ratio gives some ideas about sustainability of dividend payments.

Bank

Earnings Payout Ratio

Citigroup

7%

Bank of America

17%

Goldman Sachs

21%

Morgan Stanley

26%

JPMorgan Chase

32%

US Bancorp

33%

Wells Fargo

37%

Data source: Yahoo! Finance.

The banks essentially reverse their order from the preceding charts, but the overarching point here is that none of the banks is in any danger of overspending their earnings. That makes sense, because the banks have faced scrutiny and oversight from the Federal Reserve through annual stress tests that require approval of capital plans. In large part, regulators have discouraged banks from returning their dividend yields to pre-crisis levels, and that shows up in the fact that no bank pays even as much as two-fifths of its earnings in dividends. That isn't good news for income investors, but some policymakers believe that it's healthier for the banking system overall.

The right bank dividend stock for you

Looking at these banks, JPMorgan Chase and US Bancorp appear to have the ideal combination of current yield, dividend growth, and sustainability in their payouts without the controversy that Wells Fargo currently faces. At this point, all of the big banking stocks are in healthy positions because of anticipated favorable changes in the regulatory environment in the financial industry, but those two banks in particular could see the biggest gains of all going forward.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.