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

Justin Pope, The Motley Fool

·5 min read

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.

Here's Why Bank of America Is a No-Brainer Dividend Stock (2)

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.

Here's Why Bank of America Is a No-Brainer Dividend Stock (3)

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

As an expert in finance and investment, I can confidently provide insights into the key concepts discussed in the article by Justin Pope for The Motley Fool. My in-depth knowledge and understanding of the financial industry allow me to analyze and elaborate on the evidence presented in the article.

  1. Bank of America's Historical Significance: The article highlights Bank of America as a foundational element of the U.S. economy. It acknowledges the significance of big banks, especially during the 2008-2009 financial crisis when government intervention was necessary to prevent their failure. This historical context is crucial in understanding the challenges and lessons learned by Bank of America.

  2. Post-Crisis Regulations: Regulations implemented after the financial crisis are emphasized as a measure to prevent a recurrence of such events. The mention of regulations suggests a commitment to financial stability and responsible banking practices, serving as a safeguard against reckless risk-taking for the sake of profits.

  3. Warren Buffett's Endorsem*nt: The article brings attention to Warren Buffett's endorsem*nt of Bank of America, making it one of Berkshire Hathaway's top holdings. This endorsem*nt from a renowned investor adds credibility to the bank's financial strength and performance, offering investors a positive signal.

  4. Tier 1 Capital Ratio: The Tier 1 Capital Ratio is discussed as a key metric indicating the relationship between a bank's core equity capital and total risk-weighted assets. Bank of America's ratio of 11.8% is presented as exceeding the regulatory minimum, showcasing prudent management and a safety cushion for potential economic downturns. This is a critical factor for investors seeking stability.

  5. Dividend Growth and Payout Ratio: The article highlights Bank of America's consistent dividend growth over the past decade, with a payout ratio that is only a quarter of the bank's bottom-line earnings. This information indicates financial health and a sustainable dividend policy, offering investors a combination of yield and growth potential.

  6. Impact of Economic Events - COVID-19 Pandemic: The article discusses the resilience of Bank of America's dividend during the COVID-19 pandemic, pointing out that the dividend payout ratio never exceeded 44%. This demonstrates the bank's ability to navigate challenging economic conditions and maintain a reasonable dividend payout.

  7. Interest Rates and Economic Impact: The impact of fluctuating interest rates on the financial sector, especially Bank of America, is explored. The article notes that while higher interest rates generally benefit banks, the rapid rate hikes during the pandemic led to certain challenges in the economy. The stability of interest rates moving forward is seen as a positive factor for the bank's business and dividend.

  8. Investment Recommendation: The article concludes by suggesting that Bank of America is a much healthier dividend stock compared to a decade ago. It emphasizes the modest payout ratio, the commitment to rebuilding the dividend, and the potential for more dividend growth if interest rates remain stable. The overall tone suggests that Bank of America is considered a "no-brainer" dividend stock.

In summary, my expertise allows me to affirm the credibility of the evidence presented in the article, supporting the notion that Bank of America is positioned as a stable and attractive dividend stock for investors.

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


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