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Banks are struggling to pay bank dividends, but there’s another way to lock in income.
Dividend investors typically own a lot of bank stocks and other financials.
Banks lend money and typically pay much of their bank dividends from interest earned on those loans.
Banks are also systemically important. Our economy would essentially stop functioning without banks and other lenders. That is why our government bailed out banks during our last financial crisis.
Speaking of the last financial crisis, banks have had to undergo period “stress tests” since then. Those tests, run by the Federal Reserve, look at how much capital banks have and what sort of loans they hold to determine if they could survive another crisis.
The latest round of stress tests found banks wanting.
Those tests assumed U.S. unemployment would peak somewhere between 15.6% and 19.5%, with varying levels of loan defaults. Those tests found that banks can’t afford to increase their dividends and still be “well-capitalized,” even in the best-case scenario.
As a result, the Fed has ordered banks that have to undergo the stress tests to stop stock buybacks for now. The Fed also put new rules in place about the bank dividends. At least through the third quarter, banks can maintain bank dividends at the current levels, but they can’t raise past the rolling average of the past four quarters’ net income.
That basically means that no bank that has to undergo a stress test can increase their bank dividends for at least the next three months. Some may even have to cut their bank dividend. That’s particularly true for Wells Fargo (NYSE: WFC), which appears to have barely squeaked through its stress test.
That could be bad news.
Financials account for nearly 11% of the S&P 500 index and they pay nearly a third of its dividends. So, the crackdown on bank dividends could drag down yields for anyone who uses the S&P 500 as a benchmark. That means lower dividends could become the new norm.
The good news is that there’s a way to lock in income without relying on financials. Not only do you not have to depend on bank dividends, you can turn $5k into $2.8 million within a few short years. That’s true no matter what the economy does.
Yours in Health and Wealth,
Ben Shepherd