Here's Why Bank of America Is a No-Brainer Dividend Stock (2024)

The Big Banks like Bank of America (NYSE: BAC) are the foundation of the U.S. economy. They're so crucial that the government intervened to prevent them from failing during the financial crisis in 2008-2009.

Fortunately, regulations were put in place to help prevent that situation from happening again, and Bank of America has become a rockstar dividend stock over the years following the crisis.

Warren Buffett even made the bank one of Berkshire Hathaway's top holdings. But don't take his word or my word for it. Here are some charts that show just how good a dividend stock Bank of America is today, and how good it could be moving forward.

Learning from painful mistakes

Bank of America is one of America's largest financial institutions, with over $3 trillion in assets and operations that span the globe. Despite its massive size, it did get into a mess during the financial crisis and required government funds to stay afloat. Of course, the company's dividend was cut then, and Bank of America has spent the past decade rebuilding it.

Even 15 years later, neither the share price nor the dividend have fully recovered. Some might scoff at Bank of America stock because of its history, but one could argue that an event that destroyed so much shareholder value would teach the bank a valuable lesson.

Today, banks must meet a minimum Tier 1 Capital Ratio, a relationship between their core equity capital and total risk-weighted assets. In other words, it helps ensure banks aren't taking reckless risks with their business in the name of profits.

Bank of America's Tier 1 Capital Ratio is 11.8%, 181 basis points above the regulatory minimum. Exceeding the minimum shows that management is building some safety cushion to operate the bank. This is a good sign for investors seeking stability, especially in the event of an economic downturn.

A well-funded and growing dividend

If you look past the financial crisis and give Bank of America a clean slate, you'll like what you see. The company has steadily grown the dividend since reinstating the payout. Management has raised the dividend for 10 consecutive years, and the payout is only a quarter of Bank of America's bottom-line earnings.

Investors are getting a 3% starting dividend yield at the current share price, and the dividend's growing around 7%. That's a solid combination of yield and growth that investors can let compound over long periods.

No dividend is 100% safe because you never know what could happen. However, the COVID-19 pandemic was Bank of America's biggest challenge since the financial crisis, and the dividend payout ratio never exceeded 44%. It would probably take a highly awful economic event to turn the bank on its head.

Interest rates are stabilizing

Interest rates have somewhat whiplashed the financial sector over the past few years. The FOMC cut the federal funds rate to zero during the pandemic, which helped cause surging inflation in 2021 and 2022. The FOMC responded by raising the rate to over 5% in one of history's fastest hiking cycles.

This is both good and bad for Bank of America. Generally, banks can make more money with higher rates because it widens the gap between how much they make on lending versus what they pay depositors. But interest rates rose so quickly that it somewhat jolted the economy. Money dried up quickly in certain parts of the economy, which caused some panic and bank failures.

Nobody knows what the FOMC will do moving forward, but inflation has come down a lot, and the federal funds rate has held steady since the summer. The threat of inflation returning probably makes very low rates unlikely anytime soon, so Bank of America could see a stretch where rates are steady and somewhat high moving forward. That would be good for business and good for the dividend.

A no-brainer dividend stock

You can't disregard the past, but Bank of America looks like a much healthier dividend stock than it did a decade ago. The payout ratio is modest, and the company is committed to steadily rebuilding its dividend. The regulations should help prevent another meltdown from happening across the financial sector. Bank of America is showing that it is willing to be extra careful by beefing up its Tier 1 Capital Ratio.

If Bank of America is entering a stretch with stable interest rates, the ride should be smoother for investors. Look for more dividend growth ahead.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.

Here's Why Bank of America Is a No-Brainer Dividend Stock was originally published by The Motley Fool