How Could Bigger Dividends Change the Game for Bank of America Stock?

Bank of America suffered more than most megabanks in the financial meltdown of 2008. Its dividend policies have been under a heavy regulatory thumb ever since, but the government recently eased those restrictions a bit. Will Bank of America stock ever become an income-generating powerhouse again?

The mortgage-fueled crisis of 2008 took a heavy toll on Bank of America's investors, and the loss of a stellar dividend policy played a major part. Leading up to the meltdown, the stock had provided a yield north of 3.5% since the end of 2003, and the yield has rarely approached 1% since that adjustment. These dramatically reduced payouts shocked investors stiff.

BAC Dividend Chart
BAC Dividend Chart

BAC Dividend data by YCharts.

Bank of America finally aced the government's financial stress tests and was given a nod of approval for its capital plans. However, these plans did not include any kind of immediate dividend increase. Instead, the bank will put $5 billion into share buybacks and another $5.5 billion into preferred-share redemptions.

But a dividend boost was certainly on the table. Some of Bank of America's large rivals asked for, and received, such approvals with similar stress-test results in hand. What would $10 billion of additional dividend spending have done for the bank's shareholders?

It would have been a substantial boon indeed. The company funneled a total of $1.9 billion into dividends over the last year, so adding $10.5 billion to that shareholder-friendly line would have multiplied the payout by 5.5. At current share prices, that would work out to a 1.7% yield.

That's far from the consistent 3.5% yields of a decade ago and still well below the average yield of Dow Jones components. But an increase like that would also be a vote of confidence in the bank's fundamentals, and income investors would come looking for signs of future increases. Keep in mind that fellow Dow member JPMorgan Chase also saw its dividend cut to ankle-high levels but now offers a decent 3.1% yield. JPMorgan has crushed the Dow in the long run, largely thanks to its resurgent dividends.

Like JPMorgan's, Bank of America's shares should see a healthy boost if and when the bank's management makes a firm commitment to dividend payouts again. That's when the bank stock truly takes back its status as a driver of Dow value, rather than a drag on the index.

Bank of America's stock doubled in 2012. Is there more yet to come? With significant challenges still ahead, it's critical to have a solid understanding of this megabank before adding it to your portfolio. In The Motley Fool's premium research report on B of A, analysts Anand Chokkavelu and Matt Koppenheffer lift the veil on the bank's operations, detailing three reasons to buy and three reasons to sell. Click here now to claim your copy.

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