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By Jeremy Glaser | 03-18-2011 02:13 PM

Banks Get Back in the Dividend Game

Strong banks are being cleared to raise dividends, but financials may not be the best place to put new money to work, according to Morningstar's Josh Peters and Jaime Peters.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.

Bank dividends are back. I'm here today with Josh Peters. He is editor of Morningstar DividendInvestor, and Jaime Peters, she is the senior stock analyst who covers the big banks, to take a look at some of the dividend increases that we saw announced today and what may be in store for dividend bank investors in their future.

Josh, Jaime, thanks for talking with me, today.

Jaime Peters: Hello.

Josh Peters: Hello, good to be here. And just so nobody is out there wondering, we are married.

Glaser: So, Jaime, to start off, I just want to ask a little bit about the Federal Reserve stress test that we just recently found was completed. Can you talk to us a little bit about what the Federal Reserve was looking for and what you think the outcome was?

Jaime Peters: Sure. This is second round of stress test that they went through. The same 19 banks that went through stress tests back in 2009, now they are doing it again here in 2011. This time it's a little bit more rigorous. We're talking about going through Basel III standards. We're talking about putting in the Dodd-Frank regulation bill. All of that is going to be included in this stress test that each bank had to go through during this.

Part of it allowed them, of course, to apply for dividend increases if they wanted to during the process. This is what we're seeing today. We don't actually have all of the results of the stress test yet, but we do have is proof of who passed, because they're allow to raise their dividends.

Glaser: So, who have we seen raise their dividends so far?

Jaime Peters: Wells Fargo, J.P. Morgan, U.S. Bancorp, BB&T. I don't think they waited five minutes before they issued their press release. We also some news from PNC and Bank of New York Mellon which indicates that they have passed, but they're not quite ready to pull the trigger on the dividend raise as yet; they need to talk a little more.

Glaser: So, these were the banks that we expected would be a little bit stronger and we'd expect dividend increase from. What about some of the name we didn't hear from, like Citibank and Bank of America. Anything we could infer from not hearing from them today?

Peters: Actually, not much. Bank of America came out in their analyst day, just a couple of weeks ago, and said, we are applying for a second half of the year dividend increase. So, the fact that we didn't hear from them was not unexpected.

Citigroup suggested they weren't going to look for dividend increases or share repurchases until 2012. So, we weren't expecting to hear from them, either. We don't know what their results were from the stress test.

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