Across a wide range of industries, a combination of dividend increases and shareholder buyback programs has led this to be the “era of shareholder perks.”

#-ad_banner-#As I recently noted in my kick-off to a multi-part look at dividends, I suggested that the recent pullback in bond yields sets the stage for a renewed appreciation for dividend payers. In part two, I focused on stocks with 4%-to-5% yields and ample safety, and in part three of the series, I looked at individual stocks poised for robust dividend growth.

In that look at companies with fast-growing dividends, I noted solid prospects for such stocks in various industries, such as insurers. Yet, the most fertile area for such companies can be found in the banking sector.

Better Late Than Never
The financial crisis of 2008 was so devastating to the balance sheets of major banks and so scary to banking regulators that the thought of cash-sapping dividends were out of the question.

Some banks have been slow to regain their footing when it comes to dividends. The dividend for Morgan Stanley (NYSE: MS) for example, peaked at $1.08 a share in 2007 and currently stands at just $0.40 a share — even after doubling in 2014.

Even the healthiest banks still retain a somewhat cautious approach to dividends. Wells Fargo & Co. (NYSE: WFC) now returns a lot less of its income than it did before the financial crisis.

Wells Fargo subsequently boosted the dividend to $1.40 a share in 2014, but the key point remains: This bank — and many others — now pursues much lower payout ratios. That’s partially the result of pressure from regulators and partially due to the still-weak U.S. economy, which is dogged by a weaker housing market and generally skittish consumers. 

Yet, both of those factors are set to morph from headwinds to tailwinds. On the regulatory front, the Federal Reserve will be weighing in with its bi-annual Comprehensive Capital Analysis and Review (CCAR). The Fed wants to know that banks have built sufficient bases of capital to withstand another sharp economic downturn. At this point, banks are so well-capitalized compared to prior decades, that “too big to fail” is becoming a receding concern.

The good news: Any capital beyond mandated minimums can be more freely deployed by banks in whatever fashion they choose. Said another way, every penny that banks earn from now becomes excess cash. In effect, banks could start pursuing 100% payout ratios, while keeping their existing capital bases intact. They won’t, but they theoretically could. Instead, look for payout ratios to slowly rise to 30%, 40% or even 50%.

Let’s pivot back to Wells Fargo for just a moment. The bank, often cited as Warren Buffett’s favorite, is expected to earn around $4.20 a share this year. A 50% payout ratio (which it pursued back in 2007) translates into a $2.10 a share dividend, 50% higher than current levels.

Wells Fargo is nowhere near peak earnings in this economic cycle. The bank has massive exposure to the mortgage origination market, and by the time the housing market is back in full swing, Wells Fargo will be earning $5-to-$6 — even $7 — a share. Wells Fargo is the rare bank that has already been in fine fiscal shape, as far as the Fed and its CCAR have been concerned.

Other banks, such as Morgan Stanley or Citigroup, Inc. (NYSE: C), have been forced by the Feds to postpone or sharply modulate any major shareholder return programs. A green light on the upcoming CCAR for Citigroup could unleash a double-barreled buyback and dividend increase schedule, which I discussed a few months ago on our sister site, Profitable Trading.com. Citigroup has a trailing 12-month payout ratio of just 1.3%, according to Morningstar.

It’s not just the biggest banks that are primed for major dividend boosts. Here’s a quick look at several banks, and their payout ratios over the trailing twelve months:

Not only are these banks in a position to boost those payout ratios, but they should also see core earnings grow at a solid clip if the U.S. economy continues to grow at its current 2.5-to-3.0% pace.

Risks To Consider: Congress and the White House have slowly acquiesced to banking industry concerns that the Dodd-Frank legislative requirements were too onerous and should be scaled back. (Not a great idea in my view). If Washington decides to shift gears and re-institutes a more rigorous regulatory burden, then the profit margins and payout ratios are likely to remain subpar.

Action To Take –> You can apply this exercise to almost every kind of bank. Look at current payout ratios and also look at how their profits may grow in a firming economy. The stage appears set for these financial firms to be among the most aggressive supporters of a dividend growth policy.    

If these banks don’t interest your, then check out The Daily Paycheck. My colleague Amy Calistri spends each issue identifying high-yielding securities and reinvesting their dividends — a strategy proven to build long-term wealth. She has a portfolio of stocks devoted to growing their dividend payouts quickly. This strategy has been so successful — earning more than $76,000 in dividends since she began in December 2009 — that we urged her to spread the word to a wider audience. That’s why, for the first time, Amy took the stage to explain exactly how The Daily Paycheck strategy works. If you haven’t already, I encourage you to watch the exclusive presentation here. You won’t be disappointed.