The dramatic slump in bank stock prices has lifted dividend yields to sky-high levels relative to other stocks. But do investors, assuming they care, see this as good or bad?
The average dividend yield for the American Banker index of the 225 largest bank stocks is nearly 3%, compared with only 1.3% for the Standard & Poor's 500 stock index. Several major banks carry yields above 5%.
Most analysts said a combination of factors - rising interest rates, surging capital gains in technology stocks, and a fall from grace of value-style investing - have combined to dim the perceived value of dividends.
"The market is still dominated by growth- and momentum-oriented investors with such elevated expectations relative to the past that dividend yields don't hold the same attraction," said Frank W. Anderson, an independent industry analyst in Dallas.
Anthony J. Polini of Advest Inc. said, "The dividend yield is old hat to some degree, but you still saw some recent price support above the 5% level, even in today's new and brave world."
Indeed, some value-oriented "nibbling" in depressed bank stocks was evident as the year closed, Mr. Anderson said. "But after bond yields jumped up on Monday, you have simply had a lot of stock dumping by the momentum players."
As the year began, a pair of companies contending with disappointing earnings had dividend yields - calculated by dividing a company's dividend by its share price - much higher than those of most other major banking companies: First Union Corp.'s yield stood at 5.9%, Bank One Corp.'s at 5.4%.
Mostly, bank dividend yields have risen over the past year as the stocks fell amid a rising rate environment and investor disappointment about the industry's depressed merger prospects and reduced earnings expectations.
Some analysts said the rising yields, rather than offering an inducement to investors, were serving as a warning flag of those fundamental problems.
"If you think about the banks with the highest yields, they are not riskless situations. There are questions about the earnings growth rate," said Michael A. Plodwick of Lehman Brothers in New York. Earnings momentum is considered the real long-term driver of stock valuations.
At the same time, he said, value investors who might be attracted to bank stocks because of their relatively low price-to-earnings multiples have suffered reverses over the past year. "In some ways it was the classic value trap," Mr. Plodwick said.
Meanwhile, as high as dividend yields are in the bank sector, they are still not competitive with current yields in the bond market. "That's why interest rates matter," Mr. Plodwick said.
If rates peak, however, bank stock dividends may appear attractive. That is among the reasons bank stocks are considered excellent stocks to own as the economy is emerging from a downturn or recession, Mr. Anderson said.
But right now, dividend yields hold relatively less appeal, he said. "Investors don't want dividends because they have to pay regular taxes as opposed to capital gains," he noted. Many technology stocks, including Microsoft, pay no dividends.
Beyond competition from interest rates, there is simply competition from the outsized capital gains of recent years, Mr. Plodwick said.
"Back when a 10% annual gain in the market used to be good, it mattered that you could tack on a dividend yield of 3, 4 or 5 percentage points to the total return," he said. "But now? It's not a big deal when the Dow [Jones 30 industrials] are up 25% and the Nasdaq [composite index] is 85%."
"In a market environment where people have gotten used to outsized capital appreciation - believing that over 20% a year is their birthright - then dividend yields by definition are a smaller part of the total return," he said.