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Do stress test results mean banks will be raising their dividends soon?

The results of the most recent round of stress test on the nation's largest banks are in, and the results were overwhelmingly positive. In fact, only one bank out of the 18 that were tested failed to pass… Ally Financial (GMA).

As should be expected, some banks did better than others. Wells Fargo (WFC) was quick to release its own statement, pointing out that under the test scenarios its capital ratio was higher than necessary. Does this mean Wells Fargo investors can expect a dividend hike in the months ahead? Probably.

Wells Fargo is currently paying a quarterly dividend of $0.25, which represents a 27% payout ratio based on its 2013 earnings estimates. The company's management has said it would like to get its payout ratio closer to 50%, which would mean that its quarterly dividend could jump to as much as $0.50 per share.

Another bank that could be about to boost its quarterly dividend is Bank of America (BAC). When it requested a dividend hike in 2011, the request was denied, but this time around that is likely to change. The bank has a common capital ratio of 9.25, making it one of the best capitalized banks in the nation. The minimum needed to pass the test is a ratio of 5, so the bank has more than enough capital to justify a dividend hike. Analysts believe that we could see Bank of America lift its dividend from $0.01 to $0.04 a quarter.

A third bank that could ready to boost its dividend yield is JP Morgan (JPM). Last year the company made a lot of headlines after its London Whale trading losses, but the dust has since settled from that mishap, and the company's balance sheet is more than strong enough to deal with the losses. The bank showed a capital buffer of 6.3%, which while not as impressive as Wells Fargo and Bank of America, is still strong enough to request permission for a dividend hike.

While there has been a lot of criticism over whether or not the stress test was too easy to pass, what you should really take away from the results is that dividends and share buybacks are most likely to rise. For dividend lovers, now could be the perfect time to get into these stocks before dividend hikes are announced and shares trade higher as a result.

Disclaimer: The author of this article recently established a long position in Wells Fargo (WFC).

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.


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Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.