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.

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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).

Name Yield (%) Price YTD return (%)
Citigroup (C) 6.8 $32.00 -39.9
Bank of America (BAC) 5.4 $42.82 -17.0
J. P. Morgan Chase (JPM) 3.5 $41.37 -11.8
Wachovia (WB) 6.1 $38.48 -29.0
Wells Fargo (WFC) 3.9 $30.53 -11.1
U.S. Bancorp (USB) 5.1 $31.43 -10.0
Suntrust Banks (STI) 4.1 $67.62 -17.8
Capital One Financial (COF) 0.2 $51.50 -32.9
National City (NCC) 7.9 $20.37 -41.4
Regions Financial (RF) 6.1 $23.77 -34.3
BB&T (BBT) 5.3 $33.12 -21.3
PNC Financial Services (PNC) 3.5 $69.07 -3.5
State Street (STT) 1.1 $76.18 13.9
Fifth Third Bancorp (FITB) 6.0 $27.51 -30.5
Keycorp (KEY) 5.8 $25.02 -32.2
Northern Trust (NTRS) 1.3 $75.01 25.1
Comerica 5.8 $42.94 -25.1
Marshall & Ilsley (MI) 3.9 $30.05 -36.3
M&T Bank (MTB) 2.8 $88.28 -26.5
Union Bank of Calif. (UB) 4.0 $49.45 -17.2
Charles Schwab (SCHW) 0.9 $22.93 25.7
Zions Bancorporation (ZION) 3.4 $50.22 -37.6
Commerce Bancorp (CBH) 1.5 $35.17 1.1
Popular (BPOP) 6.8 $9.40 -46.1

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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11 Responses to “Bank Dividend Yields Rise after Sharp Decline in Prices”

  1. The Dividend Guy |  Nov 20, 2007 at 6:33 pm

    I recently posted on my site that I just entered an order to buy more Citigroup stock, basically because of the yield. I also look back to the savings and loan crisis from a number of years ago and the doom and gloom that was predicted for these stocks. As we know the stocks recovered and then some!

    These stocks are not without risk, especially Citigroup. There is talk about dividend cuts, so an investor needs to be comfortable with that risk. I think patience will payoff…

  2. Tim |  Nov 21, 2007 at 4:08 am

    me too dividend guy…i’m tired of looking at the financials in my portfolio, but am not worried about it in the long run.

  3. Yan |  Nov 21, 2007 at 9:12 pm

    I also heard talks about Citi possibly reducing dividend. I moved half of my 401K to cash one month ago and am happy I did.

  4. 2million |  Dec 02, 2007 at 8:50 am

    I just picked up some Wachovia and hope I can add to my position. I think it will make an excellent long term investment