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By Josh Peters, CFA | 04-03-2014 01:00 PM

Wells Fargo Still Top of the Bank Dividend Heap

The strength of Wells' business has allowed it to reinstate its precrisis dividend, but most of its peers are unlikely to become good dividend-paying picks, says Morningstar's Josh Peters.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The Federal Reserve recently completed its review of the big banks' capital plans. I'm here with Josh Peters, editor of Morningstar DividendInvestor, to take a look at the future of financial services' dividend payments and what it could mean for investors.

Josh, thanks for joining me.

Josh Peters: Good to be here, Jeremy.

Glaser: We've done this a few times, now, where the big banks have to submit a capital plan [detailing] what they want to do with dividends or share buybacks over the course of the year for review by the regulators. Were there any big surprises this year, or did it shake out about as you expected.

Peters: There was one and kind of big downside surprise, though it's not going to affect many people who are holding the stock for income. Citigroup's plan was rejected again; I believe this is the second time in three years that their plans have been rejected. It wasn't that their overall financial position seemed so bad, but the Fed objected to more qualitative concerns, in particular some problems that the Citi has had in managing its operations in Mexico.

Citi I think wants to pay higher dividends, wants to be able to repurchase more shares, but regulators have a lot more power now that there are those muscles that they are willing to flex to a much greater degree than in the past to prevent banks from paying out more cash to shareholders, if they don't feel like the bank is being run safely and appropriately.

On the other side of the spectrum--it didn’t get as much notice perhaps because it wasn’t the big percentage move that you saw from some other banks--but I was just delighted by the 17% dividend increase that was issued by Wells Fargo. Wells is actually the only bank that I own now. A of number years ago, I think at one point I owned as many as eight different banks. Over time, some of them I had sold before the crash; others I held through and suffered dividend cuts.

Wells has now come all the way back; their new dividend rate at $0.35 a quarter starting here in the second quarter is actually a $0.01 higher than what they paid during 2008 at the peak level. And this really reflects the strength of the bank's basic business model. It's a very large but very simple organization for the most part that takes low-cost deposits and makes loans and collects the spread. And does very well without having to get deep into investment banking and trading or wide-ranging foreign operations in order to try to grow.

And with that dividend increase, Wells cemented its position as the highest-yielding of the big banks, up around 2.8% right now thanks to that increase.

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