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Banks Showing Some Dividend Potential

"Only a handful of big banks have paid back TARP and thus can revisit dividend policy," says Roger Young, a portfolio manager who focuses on dividend stocks for Miller/Howard Investments, later adding, "If you're still on the government dole, you're precluded from it."

Of the 28 U.S. banks that boosted dividends this year, only three of them still hold bailout funds, according to data from SNL. Of banks with at least $5 billion in assets that still have TARP funds, 19% have halted dividends altogether and 39% pay just a penny a quarter.

Among those that cut to a penny are Bank of America (BAC - Get Report) and State Street, which may well have done so to maintain a presence in mutual funds that require dividend distributions. Others like JPMorgan, U.S. Bancorp, Morgan Stanley (MS), Bank of New York Mellon (BK), Capital One (COF) and BB&T (BBT) cut to at least a nickel simply to preserve capital. Others like American Express (AXP) and Goldman Sachs (GS) have kept dividends stable, but have held off on increases since the start of the downturn.

It has been difficult for dividend-focused fund managers to keep up returns over the past year when many reliable dividend payers slashed those rewards to retain precious capital. Blue-chip names like General Electric (GE), Dow Chemical (DOW), Pfizer (PFE), Alcoa (AA), Macys (M), Motorola (MOT), Weyerhaeuser (WY), CBS (CBS) and the New York Times (NYT) have all cut quarterly distributions this year.

At the same time, a low interest rate environment has made it more difficult to make up for depleted dividends with other fixed income investments. Unfortunately, investors that opt for dividend-focused funds tend to be retirees who are heavily reliant on monthly distributions for income.

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