A New Tailwind From the Fed for This American Banking Titan

Big news from the Federal Reserve is a boon for financial stocks...

You see, the financial sector typically pays out one of the highest dividend yields of any sector. But over the past year or so, that hasn't been the case.

Because of COVID-19, the Fed instituted cautious banking requirements. This was to ensure that banks had enough capital on hand to deal with any loan losses or other economic shocks caused by the pandemic. As a result, shareholder returns from banks via dividends and buybacks were suspended.

But the Fed just removed the handcuffs. And that's great for investors looking for yield...

The nation's most systemically important banks recently passed the Fed's Comprehensive Capital Analysis and Review, or "stress tests." That means their balance sheets are sound enough to survive another financial crisis.

They're celebrating by rewarding shareholders. Morgan Stanley (MS), Bank of America (BAC), and Goldman Sachs (GS) all increased their dividend payouts. Morgan Stanley and Wells Fargo (WFC) also announced new share repurchase programs.

Today's company is also using the Fed's announcement to return more cash to its shareholders...

JPMorgan Chase (JPM) is a titan of the financial industry.

It's the biggest bank for consumer loans and credit cards. And it tops the charts in terms of advisory fees for investment banking. All in all, JPMorgan ranks in the top two or three of nearly every category for banks.

As we've noted in previous issues of Stock of the Week, JPMorgan has an excellent management team. CEO Jamie Dimon has a long track record of being an outstanding banking executive. During the Great Recession, Dimon's leadership led to his firm beating the financial sector's performance by nearly eight times.

And throughout the COVID-19 crisis, Dimon's expertise was paramount. JPMorgan built up huge credit reserves for loan losses as it prepared for the worst-case scenario. At their peak, these reserves totaled $34 billion.

But that scenario didn't end up playing out. So now the company is "releasing" these reserves back onto its balance sheet in the form of earnings.

JPMorgan also benefits from the recent surge in consumer spending...

As COVID-19 restrictions lift, people are getting out and spending their cash. In fact, not only is spending up from last year's easy comparable periods, it's also coming in above "normal" 2019 levels.

At an analyst conference, JPMorgan Co-President Gordon Smith, citing spending data from its Chase consumer division, said that credit-card spending was up 17% from 2019.

And with JPMorgan passing the Fed's stress tests, it's rewarding shareholders even more...

The last time the banks passed a round of stress tests in December, the Federal Reserve said that banks were allowed to resume buybacks and dividends. In fact, the central bank said that America's banks had been a "source of strength" throughout the pandemic.

Soon after that announcement, JPMorgan said it would buy back $30 billion in stock. And it maintained its quarterly dividend payout of $0.90 per share.

This time around, it was more good news for JPMorgan...

The Fed once again said that JPMorgan's capital reserves (as well as those of 22 other financial institutions) were strong enough to withstand another shock.

And this led to JPMorgan announcing a huge boost to its dividend. Just days after the Fed's release, JPMorgan announced that it would raise its quarterly dividend by 11% to $1.00 per share, from $0.90.

The dividend announcement only makes JPMorgan's shares more attractive to yield-focused investors. After the increase, JPMorgan now has a dividend yield of about 2.5%. That's well above the S&P 500's dividend yield of 1.4%.

So investors looking for steady, solid dividend payouts will gravitate more toward JPMorgan than the broader market.

And there has been plenty of demand for JPM shares already. Since bottoming on March 23, 2020 alongside the broader market, the stock surged more than 110%, recently hitting an all-time high. Since then, shares have sold off and currently trade about 6% below their high.

Aside from the increased dividend payout, JPMorgan is one of the best banks out there. It's extremely profitable and has one of the best management teams in the business. This is a strong foundation for the company. The dividend increase is just an added benefit. That should support a move higher for JPMorgan's shares.

Sometimes investing is simple.