Stressing out your bank

Federal Reserve Board released the results of its latest stress tests of bank holding companies in March 2012, and those tests drew attention, because four of the nation’s 19 largest bank holding companies—Ally Financial, Citigroup, MetLife and SunTrust—didn’t pass. 

But unless you’re an income investor, the results are much ado about nothing, says Anthony Polini of Raymond James, which is an investment and financial-planning company. (They don’t mean that the banks are close to failing.) Income investors who seek reliable dividends shouldn’t shy away from investing in big banks, he says.

Polini says the stress tests show how strong U.S. banks are relative to their foreign counterparts. The tests evaluate whether a bank holding company, in theory, still could return extra cash to shareholders (usually in the form of dividends) if a series of unlikely scenarios unfolded. A bank that fails the test essentially is being told by The Fed to hold onto its cash in the case of a drastic downturn rather than pay, or increase, dividends.

But banks that perform well in the test could get the green light to raise dividends. For example, after The Fed released the 2012 results, Wells Fargo (NYSE: WFC; Price: $31.82) announced that it was raising its dividend by 83 percent to 22 cents a share.