S&P 500 Dividend Yield to Reach at Least 3%

Editor's note: As part of our partnership with Nightly Business Report, TheStreet's Lindsey Bell joined NBR Monday (watch video and read transcript here) to discuss what Apple's long-awaited decision to pay a dividend means to investors.

NEW YORK ( TheStreet) -- Banks boosting their dividends will lead to higher dividend yields in the benchmark S&P 500 Index, making investing more attractive to Americans who have preferred bonds.

Last week the Federal Reserve gave a number of banks the green light to return additional capital to shareholders after 15 of the country's 19 biggest banks passed the government's annual stress tests. Almost immediately, banks announced dividend increases and large share-repurchase programs.
Word on the Street

Increased dividends mean improving yields for not only the financial sector, but also the S&P 500. In 2011, the S&P 500 returned about 2% to investors due entirely to the payout of dividends. Nearly 12% of the dividends paid by the S&P 500 came from the financial sector, with only consumer-staples, health-care and industrial companies contributing more. With the recent announcements from the banks, you can expect the contribution rate from banks to increase.

Five banks announced dividend hikes -- JPMorgan ( JPM) led the charge by increasing its dividend by 20%, BB&T ( BBT) by 25%, American Express ( AXP) by 9%, U.S. Bancorp ( USB) by 56% and Wells Fargo ( WFC) by 83%.

Three other banks got Fed approval for potential dividend increases to be made later -- PNC ( PNC) could announce an increase in the second quarter, Keycorp ( KEY) will make a decision on a dividend bump in May and Goldman ( GS) didn't specify timing, but did say the Fed agreed to its proposed capital plans though the first quarter of 2013, which includes a potential dividend hike.

Stephanie Link, a director at TheStreet, says "these announcements were not surprising, yet they speak to the companies' strong balance sheets and strong competitive positioning -- these are reasons they are large core positions in the fund." She has turned more constructive on the financial sector, moving from an "underweight" weighting in Jim Cramer's Actions Alert PLUS portfolio to "overweight" in the past few weeks.

As the economic recovery takes hold, banks will be prime beneficiaries and, as such, will begin to see improving cash flow trends. That will lead other banks to announce dividend increases as well as buyback programs, driving the S&P 500 dividend yield up further.

In 2011, the S&P 500 offered a dividend yield of 2.1%. Taking into consideration only the five banks that have confirmed higher dividend policies so far, the yield on the S&P 500 would increase by about 60 basis points to 2.7%. Given that it is highly likely we'll get more dividend increases from the banks as we proceed through the year, coupled with increases from other companies with improving operations and cash flow, the yield on the S&P 500 could reach close to 3% this year.

In addition to the banks, Apple ( AAPL) today announced a quarterly dividend of $2.65 per share. That means the dividend yield on the S&P 500 would have been 3.5% last year.

-- Written by Lindsey Bell in New York.

>To follow the writer on Twitter, go to Lindsey Bell.

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