Banks Heading Into Dividend Sweet Spot: KBW

Tickers in this article: FITB PNC C JPM CIM

NEW YORK ( TheStreet) -- Bank stock investors may be looking at some very attractive dividend yields next year.

According to KBW analyst Frederick Cannon, JPMorgan Chase (JPM) -- with shares already featuring an attractive dividend yield of 2.82% based on a 30-cent quarterly payout and Friday's closing price of $42.56 -- could see its dividend yield climb to a fat 3.76% in 2013.

Cannon expects JPMorgan's payout to climb from $1.15 a share in 2012 (the dividend was raised by a nickel in the second quarter) to $1.60 next year.

As investors have learned in brutal fashion over the past five years, banking is a cyclical industry, and when heading into a recession -- especially the mother of all recessions -- it is best to bail. But at this point, despite various challenges, including narrowing net interest margins, an increasing and expensive regulatory burden, and significantly higher capital requirements, the banking industry is on the upswing.

The Federal Deposit Insurance Corp. reported last week that during the third quarter, U.S. banks earned $37.6 billion, for the industry's best performance since 2006. Credit quality was continuing to improve, and with most of the nation's largest banks having very strong levels of loan loss reserves, the release of reserves appears likely to continue for the next year or two, boosting bottom lines and mitigating the effect of margin pressure. The mortgage loan refinance boom is also providing a temporary boost to revenue, as the banks not only capture loan origination fees, they book gains on the quick sale of new loans to Fannie Mae (FNMA) and Freddie Mac (FMCC) .

And the Federal Reserve is doing what it can to make sure that investors in the nation's largest banks don't face the possibility of dividend cuts, because the regulator's stress test methodology includes a "severely adverse scenario," which will gauge the banks' abilities to pay higher dividends and repurchase shares, as per their capital plans, in the event of a severe recession, with unemployment increasing by four percentage points above current levels. The unemployment rate in November was 7.7%, according to the Bureau of Labor Statistics. Even at the low point of the "great recession," the unemployment rate didn't come anywhere near 11.7%.

A big part of investors' fear over the Fiscal Cliff is the probably expiration of the 15% maximum federal income tax rate on qualified dividend income. If we "fall off the cliff" with no deal between President Obama and the Republican leadership of the House of Representatives, dividends will be taxed as ordinary income. This will obviously be very painful for upper income taxpayers, but it will be just as painful for lower-income investors, who are currently paying no federal taxes on qualified dividend income, if their adjusted gross income keeps them within the 15% tax bracket.