Banks have long been a favorite pick of dividend investors. They offer the chance at market-beating yields in a lot of cases, and very long operating histories that can be attractive when picking a buy-and-hold investment to generate income. Bank stocks carry risks in severe downturns – as we saw during the Great Recession – but overall, banks have provided solid and growing income for many investors for long periods of time.
These characteristics have caught the eye of institutional investors – like Eminence Capital – that own banks in their portfolios for stability and income, along with capital appreciation that inevitably accrues with bank stocks that have significant economic exposure.
In this article, we’ll take a look at one major bank stock – Bank of America (BAC) – to evaluate its merit as a dividend stock holding.
Stability in a Difficult Climate
Bank of America is one of the largest banks in the world by many metrics, including market capitalization, which now stands in excess of $250 billion following a strong rally in recent weeks. Bank of America is a highly diversified financial institution, offering traditional banking services like deposit-taking and lending, but also having higher-growth businesses like investing services, wealth management, credit cards, and other related offerings. This makes Bank of America attractive not only from a growth perspective, but its sheer size and scale, as well as its diversified business lines, offer some measure of safety and stability to investors.
That stability is key when evaluating a dividend stock, because if the company’s earnings move around erratically, it makes it quite difficult for the company to pay a growing dividend. Investors saw this first hand during the Great Recession when Bank of America’s earnings collapsed and went sharply negative, forcing the dividend to be nearly eliminated, along with massive capital raises to stay in business. Of late, however, earnings have rebounded nicely and have held up well enough during 2020’s pandemic crisis to continue to raise the dividend.
Is Bank of America a Good Choice for Dividend Investors?
Bank of America’s dividend was just one penny per quarter for years as a result of the Great Recession, but the bank began raising the payout in 2014 and hasn’t looked back. Since that time, Bank of America has raised the payout each year to the current $0.72 annual dividend per share, good for seven consecutive years of growth. That’s an important consideration for a dividend stock; the management team has to be willing and able to raise the payout, and Bank of America checks that box.
In addition, the dividend should be safe to be a suitable dividend holding, preferably well-covered by a non-volatile and growing earnings base. Bank of America struggled during the Great Recession, posting massive losses through 2010. However, since producing a profit of one penny per share in 2011, the company has seen massive earnings growth, hitting $2.75 per share in 2019.
This year’s total is well down from that given unforeseen pandemic headwinds, but Bank of America is still expected to produce $1.75 in earnings-per-share in 2020. We believe the company is much better prepared for financial shocks today than it was heading into the Great Recession, and that has been proven in 2020.
These earnings characteristics are key because with the payout at $0.72 annually, even with headwinds from the pandemic, Bank of America is still producing more than twice the earnings it needs to pay the dividend this year. That makes the payout safe, as the company is proving it can weather a significant financial storm and still comfortably pay the dividend.
While banks are generally exposed to economic weakness, that doesn’t mean they cannot be strong dividend investments. Bank of America offers a low payout ratio, projected earnings-per-share growth of 5% annually in the coming years, and a highly diversified banking model that should continue to hold up nicely during economic downturns.
The yield easily beats the broader market at 2.5%, and as a result, we see it as a good dividend pick for those investors looking for a stable, income-producing stock.
Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.