Wells Fargo Is a Sound Dividend Stock

James Sinegal: We think Wells Fargo is one of the better stocks for dividend investors at the moment. It's yielding just under 3%, and management has committed to a fairly aggressive dividend payout ratio over time.

Unfortunately, Wells has been in the news for the wrong reasons this year. Management had put into place some overly aggressive sales goals which led to employees committing fraud in some cases in order to meet their numbers. We think they are well on their way to remedying those issues.

They have a new incentive plan in place. It's focused much more on profitable long-term relationships rather than short-term sales, and we think this is going to help Wells in a lot of different ways. We think it's going to help employee moral on the front lines. We think it's going to improve customer perception of Wells Fargo, and we think it's going to actually generate more profitability for the bank. One thing to remember is that the fraudulent sales activities wasted a lot of time, and they didn't bring in much revenue for the bank. We think the new plan is going to help substantially.

Beyond that, Wells' core business remains intact. Customers are not leaving the bank. They are not closing accounts. In fact, Wells has added deposit balances over the last year despite its problems. Wells has been a solid underwriter over time, did not experience huge losses in the financial crises, and the company does not have an investment bank which contributes to stability of results. We think that stable profitable business will both support the current dividend and help the company grow its dividend over time.

Wells Fargo is one of only two wide-moat banks in the United States. It's undervalued compared to our fair value estimate, and its dividend yield at this point is much higher than a lot of its large bank peers.