The news that 17 of the 18 largest banks passed the Federal Reserve’s stress tests should be heartening to investors in the financial sector: it suggests that the big banks could survive a larger shock than the global financial crisis of 2007-2008. Yet this is no guarantee that financials will become one of the higher-yielding sectors again, BloombergBlack Investment Strategist Adam Freedman writes.
Many financial companies used to pay big stock dividends, returning profits to shareholders rather than using the money to ensure they had a sufficient buffer against potential losses. From 2002 through the financial crisis, the yield on the S&P 500 Financials Index topped 2 percent. And during the second half of that period it was almost always higher than 3 percent.
During the crisis, however, many financial firms had to cut or eliminate their dividends, and regulators have since been hesitant to allow many of them to pay large dividends again. The financial sector has a lower dividend yield than all but two of the nine other sectors in the S&P 500 Index.
Even though almost every bank passed the Federal Reserve’s latest stress test, a number of them were quick to announce that they weren’t seeking to increase dividend payments. While the Fed’s verdict on each bank’s dividend plan isn’t being released until next week, both the banks themselves and the regulators seem deeply wary of aggressive dividend payouts.
The takeaway: Expect the financial sector to continue having low dividend yields for a while, Freedman concludes.
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