JPMorgan Chase just raised its pay by 9%. Is this a big one with dividends?

JPMorgan Chase (JPM -0.20%)the nation’s largest bank by assets, recently declared a third-quarter dividend of $1.25, an increase of about 9 percent. Banks are generally known as good dividend-paying stocks, and JPMorgan Chase is one of the most profitable big banks. It has significantly increased its payouts over the past decade.

Is this a great dividend stock? Let’s take a look.

A growing dividend

JPMorgan’s $1.25 quarterly dividend equates to an annual total of $5. Based on the stock price on September 23, which was near all-time highs, that results in a dividend yield of 2.37%.

It’s certainly not bad, but generally I’d like to see a yield of 3% or higher to call a dividend stock good. That said, JPMorgan is very profitable and has increased its dividend significantly, so it’s certainly possible to hit a 3% yield in the not-too-distant future.

Since JPMorgan Chase was founded in 2000, it has paid a dividend every year, although it was cut significantly in 2009 and 2010. This was common for banks after the Great Recession. Since bottoming out in 2010 at $0.20, JPMorgan has increased its annual dividend to a projected $5.

The payout ratio is a good place to start when looking at a bank’s ability to grow its dividend. As you can see below, JPMorgan has the lowest payout ratio among its peers at 26%. Banks will usually pay in the 30% to 40% range.

JPM payment rate; data by YCharts.

When evaluating a dividend, other good places to look are the bank’s earnings and excess capital, which it needs to distribute capital. When looking at analyst earnings forecasts in Visible Alpha, a financial analytics software platform, the consensus as of Sept. 23 was that diluted operating earnings per share would fall by about 8 cents next year and then rise significantly in 2026 and 2027.

In terms of excess capital, JPMorgan had a Common Equity Tier 1 (CET1) ratio of 15.3%. CET1 looks at the ratio of a bank’s core capital to risk-weighted assets such as loans. Banks use excess capital as a reserve for loans (so they need it to grow) and to pay dividends and do share buybacks.

Regulators set annual CET1 requirements for the largest US banks, JPMorgan’s requirement for 2025 is 12.3%. So the bank has about $53 billion in excess capital on a risk-weighted asset basis at the end of the second quarter.

With a quarterly dividend of $1.25, JPMorgan will pay out roughly $3.6 billion in dividends per quarter, or nearly $14.5 billion per year. But note that this comes out of the $45-55 billion in revenue it will have each year, so the bank won’t need to touch any excess capital. But even if it did somehow, it has enough to cover the annual dividend for at least four years.

It should become a good dividend

I suspect that JPMorgan Chase will continue to raise its dividend and that it will eventually exceed a 3% yield. The bank has plenty of excess capital and strong earnings. Another thing to consider is that the stock is expensive right now, which makes share buybacks less attractive.

I think JPMorgan Chase will want to put its payout ratio in that 30% to 40% range to be more in line with peers. Ultimately, I think it’s a good dividend stock. It’s not the highest yield you’ll find, but the company can easily pay its dividend and has plenty of room to grow it further.