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Banks Showing Some Dividend Potential

Investors who needed dividends to make ends meet were forced to "make some adjustments to spending priorities," according to Jim Rothenberg, head of Capital Research and Management Company, which provides investment advice to the American Funds family of mutual funds.

American Funds' Capital Income Builder fund, which has a strategy of increasing dividends over time, got burned last year by investments in Fannie Mae (FNM), Freddie Mac (FRE) and Washington Mutual, whose dividends and stock prices collapsed. At the end of 2008, financials represented 8.71% of Capital Income Builder holdings. Those holdings fell to 5.86% by April, but reversed course to represent 6.9% of net assets at Sept. 30 - good for the fund's second largest asset segment.

American Funds Web site says that in past economic cycles, "dividend-paying stocks have made solid gains early in any recovery," and asserts that "this will again be the case."

Few expect more troubled banks like BofA or Citi to start lifting dividends any time soon, but others that have repaid bailout funds -- or never accepted them, such as not only Visa but payments processing counterpart MasterCard (MA) -- and have strong capital metrics may be among the first. Smaller, more traditional lenders that never accepted TARP funds are also in a solid position to raise dividends, and some have done just that throughout the financial maelstrom.

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