Bank Dividend Yields Rise after Sharp Decline in Prices

Besides homeowners who lost their homes through foreclosure, another victim in this sub-prime mortgage crisis is the lenders which provided the loans, including the nation’s largest banks which also exposed themselves to investments tied to bad loans. The financial sector was hit very hard and the steep decline of financial shares since the summer also brought down the entire market. In fact, the turmoil in the housing and credit markets put the economy at the risk of slipping into a recession (Bloomberg.com).

After reaching the record high of 14,164 on October 9th, the Dow has given up all the gains after the Fed’s surprise larger-than-expected rate cut in September, losing 8.5% from its peak. At the same time, The Dow Jons US Financials Index (^DJSFN) has dropped 14.6% and nearly 20% so far this year.

If you own any of the big banks, you probably won’t be very happy with your stock’s performance if the share you own lost a quarter of its value in one month like what happened to Citigroup (C). There’s one brighter side though and it’s the dividend yields of the banks. As the share price dropped, the dividend yield increases. The following is a table of the nation’s largest publicly traded banks with their dividend yield, share price and year-to-data return (as of November 19th).

One year ago when I purchased my first share of Bank of America through DRIP, the dividend yield was at 4.10%. Now it jumped to 5.40%. And the yield of Citigroup is even higher at 6.80%. Of course, there isn’t much to smile about when the share price dropped nearly 40% since the beginning of the year. But for investors who reinvest the dividend distribution instead of taking it as cash and want to hold the stock for a long time, the drop in price means now the distribution can buy more shares of the stock at cheap (Citi has a 1-year forward P/E of 7.5), provided that the company can maintain its current dividend level. And those shares added without commission will make a bigger contribution in terms of return later if the stock rebounds.

At least that’s little something to gain from this mess

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