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What Investors Need to Know About Bank of America's Dividend

There are two things to take away from this chart. The first, and most obvious, is the sharp drop that occurred in the fourth quarter of 2008 and the first quarter of 2009. As former-CEO Ken Lewis explained in his 2008 letter to shareholders :

In times of severe financial stress, what financial institutions need more than anything is capital. Bank of America has, for years, been among the most well-capitalized banks in the world. But the fourth quarter of 2008 tested even our ability to maintain a deep well of financial resources.In early October, to shore up capital levels as credit losses accelerated, we raised nearly $10 billion through the sale of common stock and cut our dividend on common stock in half.

The move was difficult, but necessary; it's also not the most important takeaway from this chart. What's more important for current investors is Bank of America's previous history of consistently raising its payout. It did so every year between the turn of the century and the onset of the crisis eight years later. In that stretch of time, it went from $0.25 per share each quarter all the way up to $0.64 per share.

And this tells only half the story. If you extend the chart back three decades, you'd see that Bank of America's tendency to raise its dividend on an annual basis was a long-established trend. It had done so every year since 1977, back when Bank of America was known as North Carolina National Bank.

This is all history, of course, but I believe it's just as relevant today. Current CEO Brian Moynihan made it clear in 2011 that one of his main priorities was to reinstate a generous dividend payout, as well as to offset the dilution to its shareholders that occurred in the wake of the crisis. As Fortune 's Shawn Tully noted at the time:

In explaining his current strategy, Moynihan divides the future into two main periods. Over the next two years, he says, Bank of America will retain virtually all its earnings to build the funds necessary to comply with the new Basel III international standards of capital requirements for financial institutions, which are anticipated to be stringent. [...]When BofA has built up a sufficient capital cushion, probably two to three years from now, Moynihan plans to return all earnings to investors in dividends or share buybacks -- we're talking about $25 billion a year, all stuffing shareholders' pockets.

The bank has struggled to deliver on this promise, stumbling through three out of the five stress tests administered by the Federal Reserve, the results of which dictate whether or not the nation's biggest banks can return more capital to shareholders or not. But it finally got the go-ahead in 2014, increasing its dividend from $0.01 to $0.05 per share.

This is just a taste of what's to come. Banks have little choice but to pay out a significant portion of their earnings to shareholders. To do otherwise would mean that a bank is retaining an inordinate share of its earnings. And because retained earnings increase a bank's shareholders equity, they have the concomitant effect of decreasing its return on equity, which is calculated by dividing a bank's net income by its shareholders equity.

The net result is that publicly traded banks have every incentive to distribute at least a third of their earnings via dividends, leaving the remaining two-thirds to be split roughly evenly between share buybacks and retained earnings. Thus, as Bank of America continues to shore up its balance sheet and income statement, shareholders can assume that regular dividend increases will be one of the defining characteristics of the Charlotte, North Carolina-based bank's stock over the years and decades to come.

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The article What Investors Need to Know About Bank of America's Dividend originally appeared on Fool.com.

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Bank of America. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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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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