U.S. banks still have some work to do to restore their dividends to pre-financial crisis levels. The good news for income investors is that work continued at an impressive pace in 2014 and with that mind, financial services exchange traded funds have the look of dividend growth candidates for 2015.
“While FactSet expects all 10 S&P 500 sub-sectors to report dividend growth next year, only financials (14.8 percent) and consumer discretionary (10.3 percent) sectors are expected to report double-digit growth in dividends,” reports Constance Gustke for CNBC.
Earlier this year, the Federal Reserve revealed the results of its Comprehensive Capital Analysis and Review (CCAR). All of the major banks with the exception of Citigroup (NYSE: C) passed, allowing for, in some cases significant dividend increases by some of the major holdings of ETFs such as the Financial Select Sector SPDR’s (NYSEArca: XLF). [Bank ETFs Endure Bad News From Citi]
The Fed was reluctant to approve payout ratios in excess of 30%, but a few banks got permission to exceed that level, including U.S. Bancorp, Wells Fargo (NYSE: WFC), Northern Trust (NasdaqGS: NTRS) and M&T Bancorp (NYSE: MTB). J.P. Morgan Chase’s (NYSE: JPM) payout ratio is 28.7%.
Financial services dividend growth impressed in 2014 and that could serve as a launching pad for more of the same in 2015. Financials featured in the WisdomTree Dividend Index posted 2014 dividend growth of 21.3%, the best of the 10 sectors tracked by that index.
Financial services dividends grew “more than 21% since last year’s screening and has averaged more than 20% growth over the past five years. Even after the impressive growth since the 2009 lows, the sector’s dividends are still more than 17% below their 2007 highs, and it’s the only sector whose Dividend Stream remains below its 2007 highs,” said WisdomTree Research Director Jeremy Schwartz in a note published earlier this month.
Due to the fact that it does not focus on dividend increase streaks, the WisdomTree Total Dividend Fund (NYSEArca: DTD) is able to feature an 18.6% weight to the financial services sector, which is large compared to other well-known dividend ETFs.