On Thursday the Fed will announce which big U.S. banks will be allowed to raise their dividends--expect lots of dividend action with Wells Fargo and Citigroup leading the wy

03/12/2012 4:05 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The U.S. Federal Reserve will make big headlines this week—just not at tomorrow’s (March 13) meeting of its Open Market Committee. The Fed body that sets short-term interest rates is expected to leave rates just where they are at 0% to 0.25% and put a damper on whatever hopes for a third round of quantitative easing the financial market may still have.

In other words, business as usual Tuesday.

Thursday is a very different matter.

That’s the day when the Federal Reserve is scheduled to announce the results of its annual stress test on U.S. banks. The Fed is expected to give the go ahead for big dividend increases at banks that cut their dividends after the Lehman bankruptcy and that have been prohibited from raising dividends back to former levels since then by the Fed’s rulings that they hadn’t built up capital reserves to withstand another financial crisis.

Dividends at the 19 largest U.S. lenders will climb 30% in 2012 from 2011, according to Wall Street estimates. The biggest jumps, analysts project will occur at Wells Fargo (WFC) and Citigroup (C). Citigroup now pays a nominal one-cent a share quarterly dividend. Wells Fargo’s current quarterly dividend is 12 cents a share for a yield of 1.75%. Overall, estimates Barclays Capital, banks (excluding investment banks such as Goldman Sachs (GS) and Morgan

Stanley (MS)) will raise their payout ratios from 24% of earnings in 2011 to 48% of earnings in 2012. The dividend yield on the KBW Bank Index (BKX) is now just 1.8%, about half the 2007 level.

The stress test asked banks to model their capital ratios if unemployment hit 13% and housing prices slumped another 20%.

Bank of America (BAC) will be absent from any Fed announcement. After getting its request to raise its dividend rebuffed by the Fed in the last stress test, the bank didn’t ask to raise its dividend or stock buyback in this round.

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