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Is Wells Fargo a Good Stock for Dividend Investors?

Four jars with ever-growing numbers of coins and an increasingly bigger plant.

Wells Fargo (NYSE: WFC) has had its fair share of troubles over the past year, beginning 12 months ago when regulators revealed a massive multiyear sales scandal that had taken place at the bank. But this doesn't necessarily mean that the California-based bank is a bad investment.

If you're a dividend investor, in fact, there's a lot to like about Wells Fargo. You can see this by looking at the bank's performance on the three most important metrics for dividend investors.

Four jars with ever-growing numbers of coins and an increasingly bigger plant.

Image source: Getty images.

1. Dividend yield

The dividend yield is the most commonly known metric when it comes to income investing. This measures how much a stock pays in dividends each year relative to its share price.

In Wells Fargo's case, it has paid out $1.56 per share in dividends over the trailing 12 months. Meanwhile, its shares are currently priced at $50.97 each. By dividing the former by the latter, you get Wells Fargo's dividend yield of 3%.

A bar chart comparing the dividend yields of the 20 biggest banks.

Data source: YCharts.com. Chart by author.

That's a healthy yield when you consider that the average yield on the S&P 500 is 2%. It's even more impressive when you look only at big banks. Out of the 20 largest banks, shares of Wells Fargo have the highest yield.

2. Dividend growth

Aside from the yield, which tells you how much a stock is currently paying out, the second most important metric for dividend investors is the growth rate of a particular stock's quarterly distribution.

When Wells Fargo raised its dividend earlier this year following the conclusion of the 2017 stress tests, it did so by a smaller amount than many of its peers did, boosting it by only a penny, from $0.38 per share up to $0.39 per share.

WFC Dividend data by YCharts .

However, if you look back on Wells Fargo's history of dividend increases, what sticks out is its consistency. It has increased its dividend per share every year since 2010. This doesn't necessarily mean that Wells Fargo will continue to do so, but a history of consistent increases certainly seems to make it more likely as opposed to less likely that it will keep up this trend.

3. Dividend payout

The final major dividend metric that investors use to assess the quality of income-producing stocks is the payout ratio . This measures the percent of income that a company pays out in dividends each quarter.

There is no hard-and-fast rule when it comes to payout ratios. That being said, a lower ratio is better than a higher ratio from the perspective of future dividend growth. Moreover, most banks seek to distribute at least a third of their income to shareholders, while using a third to buy back stock, and retaining the final third to fund organic growth.

A donut chart showing that Wells Fargo pays out 41% of its net income via dividends.

Data source: Yahoo! Finance, YCharts.com. Chart by author.

In Wells Fargo's case, it paid out 41% of its earnings over the last 12 months. That compares to an average of 30% among the nation's 20 biggest banks.

In sum, while Wells Fargo's high payout ratio suggests that its dividend won't grow as quickly as at some of its peers, its voluptuous yield combined with its consistent annual increases make this stock a worthy contender for any income investor's portfolio.

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John Maxfield owns shares of Wells Fargo. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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