NEW YORK ( TheStreet) -- Financial stocks were trending higher on Friday, on bullish signals about the U.S. recovery and dividend potential in the near-term.

The KBW Bank Index was up 0.6%, outpacing a rise in the broader market.

Capital One ( COF - Get Report) was soaring 2.5% higher at $42.32 after an analyst suggested the stock has 28% upside potential. Scott Valentin of FBR Capital Markets upgraded the stock to buy with a $53 price target, saying the market is overestimating Capital One's exposure to mortgage buybacks.

Earlier in the day, blue-chip industrial company General Electric ( GE - Get Report) lifted its quarterly dividend 17% to 14 cents per share. Though GE is an industrial conglomerate, losses at its financial division caused the company to lower its dividend during the crisis. Its share price moved in tandem with financial stocks for an extended period as investors questioned its exposure to credit costs.

Bank stock investors could see GE's move as yet another positive sign regarding bank dividends. The top 19 banks are now providing detailed capital plans to the Federal Reserve, which will conduct stress tests on their financials. The Fed is expected to allow the healthiest banks to return capital to shareholders through buybacks and dividends as soon as next month.

JPMorgan Chase ( JPM - Get Report) and Wells Fargo ( WFC - Get Report), which have both been cited by analysts as likely to gain approval for dividend hikes, were both up more than 1% in afternoon trading.

Bank of America ( BAC - Get Report), which is expected to need to wait a bit longer before raising its payout, was down 0.2% at $12.62. The Charlotte, N.C.-based bank said on Friday that it has resumed foreclosures in states where paperwork was in question.

Elsewhere in the sector, American International Group ( AIG - Get Report) extended its rally, hitting new 52-week highs. The catalysts for the stock movement are the company's plan to start exiting its bailout in the next few months and its top investors buying two million additional shares. In recent trading, AIG was up 2.2% at $48.81, having risen as high as $49.86 earlier in the day.

Other top gainers were regional banks like M&T Bank ( MTB - Get Report), up 3% at $85.75 and Marshal & Ilsley ( MI), up 2.3% at $5.87. On the downside, Regions Financial ( RF), which has seen a sharp increase in short positions in recent weeks, was down 1.2% at $6.42.

-- Written by Lauren Tara LaCapra in New York.

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