Why Bank of America Corporation (NYSE:BAC) Should Be In Your Dividend Portfolio – Yahoo Finance

Dividend paying stocks like Bank of America Corporation (NYSE:BAC) tend to be popular with investors, and for good reason – some research suggests a significant amount of all stock market returns come from reinvested dividends. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.

With Bank of America yielding 3.0% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. We’d guess that plenty of investors have purchased it for the income. The company also returned around 13% of its market capitalisation to shareholders in the form of stock buybacks over the past year. Remember though, given the recent drop in its share price, Bank of America’s yield will look higher, even though the market may now be expecting a decline in its long-term prospects. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Click the interactive chart for our full dividend analysis

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. Bank of America paid out 24% of its profit as dividends, over the trailing twelve month period. With a low payout ratio, it looks like the dividend is comprehensively covered by earnings.

Consider getting our latest analysis on Bank of America’s financial position here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. For the purpose of this article, we only scrutinise the last decade of Bank of America’s dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past ten-year period, the first annual payment was US$0.04 in 2010, compared to US$0.72 last year. Dividends per share have grown at approximately 34% per year over this time.

It’s rare to find a company that has grown its dividends rapidly over ten years and not had any notable cuts, but Bank of America has done it, which we really like.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend’s purchasing power over the long term. It’s good to see Bank of America has been growing its earnings per share at 45% a year over the past five years. The company is only paying out a fraction of its earnings as dividends, and in the past been able to use the retained earnings to grow its profits rapidly – an ideal combination.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We’re glad to see Bank of America has a low payout ratio, as this suggests earnings are being reinvested in the business. We like that it has been delivering solid improvement in its earnings per share, and relatively consistent dividend payments. Bank of America fits all of our criteria, and we think it’s an attractive dividend idea that would warrant further investigation.