Published January 31, 2013
Bank dividends are not yet back to the levels seen prior to the financial crisis, but some U.S. banks are improving on the dividend front. For example, Wells Fargo (WFC) recently announced an increase of its quarterly payout to 25 cents a share from 22 cents.
Other bright spots include Dow component J.P. Morgan Chase (JPM), whose quartely dividend has gone from just five cents a share in the first quarter of 2011 to the current level of 30 cents. US Bancorp (USB) is now paying 19.5 cents a share per quarter compared with five cents per share in the fourth quarter of 2010.
The rub for ETF investors looking to participate in the trend of rising bank payouts through dividend ETFs is the screening methodology used by some of those funds. Meaning some major dividend ETFs use the length of a stock's dividend increase streak as the primary criteria for inclusion or exclusion.
For example, the Mergent Dividend Achievers Select Index, the index tracked by the popular Vanguard Dividend Appreciation ETF (VIG), requires its constituents to have a dividend increase streak of at least a decade. The S&P High Yield Dividend Aristocrats Index, the index tracked by the SPDR S&P Dividend ETF (SDY), requires a dividend increase streak of 20 years. That means investors in those funds are missing out in the resurgence of bank dividends.
"While still needing significant growth to reach previous highs, financial sector dividends have grown from that annual low of $29 billion to $55 billion in 2012, or almost 17% of all indicated dividends in the U.S.," WisdomTree Research Director Jeremy Schwartz said in a new research note. "Even though this figure is still almost 43% below its previous peak, Financials is still the sector paying the greatest amount of regular indicated dividends in the United States."
SDY does feature a weight of almost 15 percent to financial services names, but that comes mainly by way of exposure to asset management and insurance firms, not money center banks. VIG, the largest dividend ETF by assets, features a weight of just 6.3 percent to financials.
Investors looking to capture a slice of increasing bank dividends without committing to a sector-specific ETF have options. The WisdomTree LargeCap Dividend Fund (DLN) features a 12.6 percent weight to the financial services sector. The $1.4 billion DLN has a 30-day SEC yield of 2.82 percent. Consumer staples and technology are the two sectors that are larger within the ETF than financials.
Another option is the WisdomTree Total Dividend Fund (DTD). Financials are the largest sector weight in DTD at almost 17 percent. The $282.6 million ETF has a 30-day SEC yield of 2.9 percent. Including dividends paid, DLN and DTD are each up about 15 percent in the past 12 months.
"With the financial sector recovering, we may expect to see financials be one of the leading contributors to dividend growth of the marketand backwards-looking dividend growth screens may counterintuitively hamper the respective indexes' ability to capture that growth," said Schwartz.
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