ETFs Set to Benefit as Bank Dividends Rise

The Federal Reserve’s annual Comprehensive Capital Analysis and Review (CCAR) program is underway, meaning the central bank is reviewing plans by major U.S. banks to return capital to shareholders. That includes dividends and share repurchases.

This year’s CCAR program is reviewing 30 large U.S. banks and the results are expected to be revealed next month. Financial services ETFs such as the Financial Select Sector SPDR (NYSArca: XLF) are expected to see at least some of their constituents announce higher payouts in the second quarter.

“Markit believes average dividend growth in 2014 will be on par with 2013. The most significant changes are concentrated in three banks: Bank of America (NYSE: BAC), Citigroup (NYSE: C), and Morgan Stanley (NYSE: MS). Though trailing the group in recent years, these three appear poised for major dividend growth in 2014. Expectations for the remainder are more pedestrian, thanks to Fed guidelines discouraging payouts greater than 30%. Though payouts exceeding 30% are not explicitly prohibited, the Fed notes such actions would attract their increased attention. Because payouts across most banks already approach 30%, we have lower projections for banks outside the top five,” according to the research firm.

Bank of America and Citigroup are XLF’s fourth- and fifth-largest holdings, respectively, combining for 12.2% of the ETF’s weight. Morgan Stanley receives a 1.5% allocation in XLF, the largest U.S. sector ETF by assets. [Rotating Through Strong Sector ETFs]

Markit is forecasting dividend increases to five cents a share per quarter from a penny a share for Bank of America and Citi. The research firm also expects Morgan Stanley will double its quarterly payout to 10 cents per share. Other big dividend increases on a percentage basis are expected from Zions Banorp (NasdaqGM: ZION) and Regions Financial (NYSE: RF). Markit sees dividend increases for that pair of 75% and 67%, respectively.

Markit’s outlook for dividend increases in the financial services sector jibes with other forecasts. Bloomberg recently ranked the top 25 potential dividend growers pulled from a universe of 130 S&P 500 constituents expected to boost payouts over the next three years. The banks that appear on the list are as follows in ascending order: Comerica (NYSE: CMA), Bank of New York Mellon (NYSE: BK), KeyCorp (NYSE:  KEY), Morgan Stanley, Huntington Bancshares (NasdaqGM: HBAN), Discover Financial Services (NYSE: DFS), SunTrust (NYSE: STI), Regions Financial and Citigroup. [Bank ETFs for Dividend Growth]