Banks have shown a preference for buybacks to dividends because a firm can elect to buy back shares anytime it wants, depending upon market conditions and the operating environment.

This offers them the option to build capital when the environment takes a turn for the worse.

They tend to have less flexibility with dividends. Failure to pay dividends or a reduction in dividend is often treated as a really bad signal by the market.

From that perspective, Goldman's dividend increase could be seen as a particularly bold signal on part of the management.

-- Written by Shanthi Bharatwaj in New York.
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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