The Most Dangerous Dividends on Earth

The older I get, the more persuaded I am by the truth in a familiar maxim: It’s easier for a leopard to change its spots than a person or institution to change its ways.
Others see it differently: Leopards do change their spots; people and institutions do change their ways. breaking-bank
At least that’s my perception based on the rekindled love bestowed on the big nationwide banks. JPMorgan Chase (NYSE: JPM), Wells Fargo (NYSE: BAC) and US Bank (NYSE: USB) trade near all-time highs.  Citigroup (NYSE: C), Goldman Sachs (NYSE: GS) and Bank of America (NYSE: BAC) trade near multi-year highs.
In late 2008, the aforementioned banks circled the drain. Dividends were slashed and billions of dollars of investment value were lost during the greatest financial crises (caused in large part by large banks themselves) since the Great Depression. Only through the grace of God and the Federal Reserve did these banks survive.
That was then, this is now.
After being slapped on the wrist and after having numerous bureaucratic fingers wagged in their direction, bankers learned a lesson – so we were told.
As the story goes, bankers are now contrite. The focus is no longer on leveraged bet-the-ranch trades to generate obscene year-end bonuses. It’s about value creation for shareholders. It’s about running a business conservatively to earn money to buyback shares and raise dividend payouts. It’s banking 101.
That’s the doe-eyed thesis investors stumble across when a pro-big-banking pundit pimps the income wonders of big-bank stocks.
But have the spots changed? JPMorgan suffered $6 billion in losses in derivatives to semantically “manage risk” in 2012. It also paid nearly $1 billion in fines to U.S. and U.K. regulators related to said risk management.
A 2013 bank exposé featured in The Atlantic provided a provocative quote from Paul Singer, who runs Elliott Associates.
“There is no major financial institution today whose financial statements provide a meaningful clue,” Singer wrote to his partners in 2012.
This week Reuters reported that big banks were lobbying the Federal Reserve to buy back more shares and raise dividend payouts. That’s all well and good, until you wander into the nettle of fine print. Much of the money for buybacks and higher dividends will come from issuing preferred stock, not from operating profits.
These banks, so desirous for permission to express shareholder-friendly bona fides, are essentially taking money from one set of investors and giving it to another – and at an added cost. The yield on preferred shares can be two percentage points or more higher than the yield on the common shares.
Issuing preferred shares to pay for common share dividends and buybacks is a symptom of a moribund banking system. Last year, banks in aggregate reported operating income of $151.2 billion, down 0.4% from the year before. To increase curb appeal to investors, many larger banks want simply to increase financial obligations. For common stock holders, higher dividends and higher EPS will be smoke and mirrors.
I’ve always believed size matters. As it relates to banking, smaller is better. Three of my favorite  banks are small, conservative operators serving hinterland markets. Their business is banking, not gaming the regulators. Borrow, lend, sell financial services, make money – that’s it.
City Holding Co. (NASDAQ: CHCO) is a West Virginia-based bank with a $650 million market cap that yields 3.6%. In nearby Kentucky, Community Trust Bancorp (NASDAQ: CTBI) sports a $565 million market cap and yields 3.7%. Texas-based Cullen/Frost Bankers (NYSE: CFR) is the whale among the small fry, with a $4.4 billion market cap. Cullen/Frost yields 3%.
All three maintained their dividends during the 2008 market meltdown. All three continue to grow their dividend annually. Their dividends are funded by operating profits.
Boring? Probably. But with banking, the degree of titillation matters as much as size. Less is better.

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The average yield of the Dow has sunk to 2.1%. That’s just sad. However, we know of one group of investors collecting up to $550 every 30 days from a little-known investment that yields a whopping 12%! That’s roughly six times bigger than the average yield of the Dow. If you’d like to tap into this income stream, and earn six times bigger dividends, click here for our full report on this opportunity. 

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