Where are the opportunities--and land mines--among dividend-paying stocks right now? To help answer those questions, I recently sat down with Josh Peters, Morningstar's resident dividend guru and the editor of Morningstar DividendInvestor. In last week's Improving Your Finances, Josh provided some of his best ideas. In this week's installment, Josh provides his outlook for some traditionally high-yielding sectors.
Christine Benz: One area of the dividend-paying universe, financials, has obviously been through a lot of turmoil. Can you discuss your outlook, as well as whether you've found anything attractive?
Josh Peters: That one's tough, because virtually all of the banks in this country of any size have reduced their dividends. A lot of banks had to cut their dividends because they were generating losses and you can't afford to deplete your capital base by paying out capital as dividends when you're also losing money. But there was also an awful lot of pressure from regulators and even from Congress, that once the government was starting to lend direct support to financial institutions, they didn't want to see those same institutions paying large dividends. So, even banks whose financial strength might have allowed them to maintain their dividends had to succumb to that pressure.
The way I look at the financials sector right now, at least as far as the banks go, is that it's really a dividend-recovery and dividend-growth story. Wells Fargo (WFC) is a good example. Right now, they're only paying out $0.05 a share each quarter. Before that, they were paying out $0.34 a quarter. So, your income got clobbered if you owned Wells Fargo, but the bank's earning power did not get clobbered. Because they were in a position of strength going into the crisis, they've been able to capitalize on that by acquiring Wachovia. It's now a much larger institution that should be able to do a very good job of growing that business and recouping the profitability lost during this cycle. You'll probably wind up with Wells Fargo paying a dividend a couple of years from now that is higher than it was before the crash. But it will take three, five, maybe even six years to get there.
US Bancorp (USB), another outstanding lender, has a lot of the same characteristics. Its corporate DNA was to return the bulk of earnings to shareholders, either through dividends or share buybacks, and they've been very disciplined about how they've done it.
