Dividend Increase | Bank of America (BAC)

Dividend | Dividend Growth | Financial Independence | Freedom | Passive Income
Getting a pay raise while sitting on the couch?  Sign me up!  Thanks Bank of Ameica for another dividend increase!

There's an old Chinese proverb that says "the best time to plant a tree was 20 years ago, the next best time is now".  The reason for this is that it takes time for a tree to grow and prosper and for you to start reaping its benefits.  Dividend growth investing is much the same way.  It takes consistent saving and investing as well as time and patience to let the power of dividend growth take hold.

That's why one of my favorite things is when one of the companies I own decides to pay out more in dividends.  You mean I get a pay raise just for owning a small piece of a company?  Not going and doing R&D for new products or technology.  Not selling any products.  Not managing any employees or inventory.  Not making sales calls.  All I had to do was have the foresight to invest some of my savings in excellent companies.  

On July 21st the Board of Directors at Bank of America (BAC) officially announced an increase in their quarterly dividend payout.  The dividend was increased from $0.18 to $0.21 which is an excellent 16.7% increase.  The raise was previously forecast back in June after Bank of America passed the FED stress tests.  Bank of America is a Dividend Challenger with 8 consecutive years of dividend growth.  Shares currently yield 2.20% based on the new annualized payout.

The new dividend will be payable September 24th to shareholders of record as of September 3rd.

Since I own 161.817 shares of Bank of America in my FI Portfolio, this raise increased my forward 12-month dividends by $19.42.  I first purchased shares in 2011 and I've now received 6 dividend raises with total organic dividend growth coming in at 2,000% although I don't think that pace will continue on.

I also own 113.893 shares of Bank of America in my Roth IRA and this raise increased my forward 12-month dividends for that portfolio by $13.67.

A full screen version of this chart can be found here.

Prior to the Great Recession in 2007/09 Bank of America had a nice streak of above average dividend growth as they continued consolidating the smaller regional banks.  Unfortunately, the Great Recession and housing crisis hurt the big banks considerably forcing them to get bailouts and placed under further regulations.  Bank of America was able to start growing their dividend once again in 2014 and have delivered raises every year since.

The 1-, 3-, 5- and 10-year rolling dividend growth rates since 1994 can be found in the following chart.  

A full screen version of this chart can be found here.

For dividend yield theory I consider the fair value range to be the forward dividend yield +/- 10% compared to the 5 year moving average, the under/over value area to be to between 10%-20% deviation from the average and significant over/under value are greater than a 20% deviation from the average.

A full screen version of this chart can be found here.

Bank of America's 5-year average forward dividend yield is 2.04% which corresponds to a share price of $41 based on the new annualized payout.  

I consider the fair value range based on dividend yield theory to be the 5-year moving average yield +/- 10%.  That gives a fair value range of $37.50 - $46.00 and suggests that Bank of America is trading on the low end of fair value.

Wrap Up

This raise increased my forward dividends by $19.42 with zero effort on my part.  That's right, absolutely nothing to contribute to their operations.  Based on my FI Portfolio's current yield of 2.20% this raise is like I invested an extra $881 in capital.  Except that I didn't!  One of the companies I own just decided to send more cash my way. 

That's how you can eventually reach the crossover point where your dividends received exceed your expenses.  That's DIVIDEND GROWTH INVESTING AT WORK!  The beauty of the dividend growth investing strategy is that you build up your dividends through fresh capital investment as well dividend increases from the companies you own.

I've now received 30 raises from the companies in my FI Portfolio increasing my forward-12 month dividends by $422.96.

My FI Portfolio's forward-12 month dividends are $8,382.80  Including my FolioFirst portfolio's forward dividends of $174.82 brings my total taxable accounts dividends to $8,557.62.  My Roth IRA's forward 12-month dividends are $811.44.  My Rollover IRA's forward dividends are $3,794.57.  Across all accounts I can expect to receive $13,163.63 in dividends over the next year.

I've also started compiling dividend data on many of the companies that I own or would like to own.  Bank of America's can be found here which includes the dividend history (as far back as I can find without spending hours hunting it down), rolling dividend growth rates and dividend yield theory.  To see other companies that I've already gathered the data on you can check out the Dividend Companies page.  Check it out and let me know what you think.

Do you own shares of Bank of America or any of the other TBTF banks?  Do you think they can continue on with above average dividend growth for the next 3-5 years?

Please share your thoughts below.