One reason so many investors follow the Dow Jones Industrial Average (INDEXDJX:.DJI) is that all 30 of its component stocks pay dividends. Yet some Dow Jones Industrial Average (INDEXDJX:.DJI) stocks are better about rewarding their shareholders with high dividends than others.
In particular, three Dow Jones Industrial Average (INDEXDJX:.DJI) stocks have dividend yields that are less than 1.5%. Given that the average dividend yield for the Dow overall is more than 2%, these lagging stocks raise an obvious question: should companies that are skimping on their payouts raise their dividends to keep up with their Dow peers? Let’s take a closer look at these three stocks to evaluate whether they should boost their dividend payouts.
Bank of America Corp (NYSE:BAC)
Bank of America Corp (NYSE:BAC) has the lowest dividend yield in the Dow, paying out just 0.3%. That wasn’t the case before the financial crisis, when it and several of its banking peers had quite attractive yields on their payouts. Yet after the mortgage meltdown wrought havoc on bank balance sheets, Bank of America Corp (NYSE:BAC) cut its dividend to a single penny per share quarterly in order to qualify to receive TARP bailout funds.
For years since the crisis, B of A has worked hard to restore its financial condition, selling off non-core assets and building up its balance-sheet strength. Earlier this year, many analysts expected Bank of America Corp (NYSE:BAC) to raise its dividend after passing the Federal Reserve’s stress tests. Although the bank did win approval to buy back $5 billion of its common shares and redeem $5.5 billion in preferred shares, it chose to leave its dividend unchanged.
Bank of America Corp (NYSE:BAC)’s yield now lags behind most other major banks, which have restored a substantial portion of the payouts that they previously cut. Given some of the new potential legal liabilities that have arisen recently for Bank of America Corp (NYSE:BAC), though, keeping cash on hand rather than increasing dividends might have been a more prudent decision for the bank.
The Walt Disney Company (NYSE:DIS)
Multimedia giant The Walt Disney Company (NYSE:DIS) isn’t nearly as stingy as Bank of America, but at about 1.2%, its yield is still relatively low compared with the rest of the Dow. Unlike most other companies, The Walt Disney Company (NYSE:DIS) only makes a single annual dividend payment, and although the company has made substantial annual increases of between 14% and 50% in each of the past three years, its stock price has performed so well that the higher payouts haven’t boosted yields very far.
With a payout ratio of just 23%, The Walt Disney Company (NYSE:DIS) clearly earns enough money to raise its dividend at a quicker pace going forward. Yet keeping more cash on hand has helped the company maintain the flexibility to make major strategic moves, such as its $4 billion acquisition of Lucasfilm late last year. Moreover, with the increasing costs of producing and obtaining content, The Walt Disney Company (NYSE:DIS) will want to make sure it doesn’t put itself in a position to rely on mercurial capital markets for financing needs.
Nevertheless, The Walt Disney Company (NYSE:DIS) could raise its dividend to the 2% range without sacrificing much in terms of financial flexibility. Look to see whether such a move comes when the company declares its annual dividend toward the end of this year.
American Express Company (NYSE:AXP)
High-end card company American Express Company (NYSE:AXP) also carries a low yield of less than 1.3%. It, too, has an extremely low payout ratio near 20%, indicating just how little of its earnings power it shares with its investors. Admittedly, AmEx has made modest moves to increase its payout in the past, with a 15% boost coming after the company passed the Fed’s stress tests earlier this year.
Whether American Express Company (NYSE:AXP) needs as much liquidity as it maintains depends on which strategic direction it takes in the future. With big competition brewing in the mobile payments arena, American Express Company (NYSE:AXP) might need substantial funds for capital expenditures if it wants to make a strong foray into the space. Yet if it merely chooses to take on projects like its Bluebird prepaid card offering, American Express Company (NYSE:AXP) could afford to return more of its capital through dividends without compromising its financial health.
Expect more
In general, stocks that pay dividends inspire confidence among shareholders because they prove that companies have investors’ interest in mind. These three Dow stocks might not boost their dividends in the near future, but if their long-term strategies pan out, then shareholders should expect rewards through higher dividends in the long run.
The article When Will These Dow Stocks Raise Their Dividends? originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger owns warrants on Bank of America. The Motley Fool recommends American Express, Bank of America, and Walt Disney (NYSE:DIS) and owns shares of Bank of America and Walt Disney.
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