Bank Dividend Yield Revisited

Last November, shortly after the Dow peaked at 14,280 points, I had a post on dividend yields of the largest banks in the country. At that time, I thought that, with many bank stocks yielding 6.0% or more, buying banks make some sense if the banks can keep their dividend payouts.

That was then and we all know what happened since then.

Big banks like Citibank, Washington Mutual, were hit hard by billions of write downs tied to bad loans and literally had to be bailed out by foreign investors. At the same time, shares of these banks have plunged to multi-year lows with no end in sight (just when you thought it may be over, another shoe dropped). To have an idea on how bad things have been in the past year for big banks, take a look at the following plot, showing 1-year performances of the big-three: Citigroup (C), Bank of America (BAC), and J. P. Morgan Chase (JPM), against the Dow Jones U.S. Finance Index (^DJUSFN).

As banks eliminated thousands of jobs and sold billions of assets in order to shore up capital, they also cut back dividend distributions, which we can also see as an inevitable step to take in desperation (nobody wants to follow the fate of Bear Stearns for sure). So the above assumption, banks hold their dividends, no longer holds. However, the reduction in dividend payout doesn’t mean the yield will follow because share prices of many banks have fallen even further.

At the time when the subprime mortgage triggered financial crisis approaches one-year anniversary,  I looked again at dividends of some largest banks in the country and to my surprise (well, I am not really surprised), I found that the dividend yields have gone even higher, though many financial companies have cut by half (for example, Citigroup by 41.%, WaMu by 72%). Of course, the increased yield is at the expense of the falling share price (see last colum in the following table, 1-yr return, only two have positive 1-yr return).

If you are an existing shareholder of any of those big banks (I own BAC), you obviously are not happy with how your stock has performed lately despite the high yield. If you are not a owner, but consider buying some bank shares, the following financial ETFs can be alternatives to individual bank stocks:

• Financial Select Sector SPDR (XLF): 1-yr return -39.8%
• iShares Dow Jones US Financial Sector (IYF): 1-yr return -36.7%
• iShares Dow Jones US Financial Services (IYG): 1-yr return -42.4%
• iShares Dow Jones US Regional Banks (IAT): 1-yr return -42.4%
• PowerShares Dynamic Banking (PJB): 1-yr return -23.14%
• PowerShares Financial Preferred (PGF): 1-yr return -14.3%
• Ultra Financials ProShares (UYG): 1-yr return -65.6%
• Vanguard Financials ETF (VFH): 1-yr return -35.7%

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