Dividends and Taking a chance on Bank of America

There are many theories on how to invest and how much to invest and occasionally a simple one is the best one. In an recent article by Benj Gallander and Ben Stadelmann who co edit Contra the Heard Investment Letter, they wrote about Bank of America.

Bank of America was started in the San Francisco during the gold rush time, built up a franchise on the west coast, when the government allowed big banks to merge, the bank merged with Nations Bank to become Bank of America. In the depths of the banking crisis, B of A bought Merrill Lynch. Along the lines, B of A wanted to be the number one or two bank, when consumers thought about banking products and for a time it was that bank. In 2008, the price of the stock fell to $6.76 and Warren Buffett helped bail it out.

The simple idea Benj and Ben had was because of the name Bank of America, failure of the name of the biggest consumer banks would be a blow to America’s ego. The bank would survive and the stock would rise up. It took a few years and it did happen. Now the bank’s dividend is growing and the stock price is in the $30 range. The recent quarter was excellent, the bank made $7.2 billion and Merrill edge has $200 billion is assets under administration. Generally they are going to make an easy fee from the $200 billion.

Linking to dividend paying stocks, it is much easier to have a simple reason when the company is making a profit and paying dividends, because many aspects of the company are doing well. The issue is can it be better and when. In the case of Ben and Benj, the issue was yes it will because of the strength of the underlying assets of the company. Sometimes simple works.

There are more questions than answers, till the next time – to raising questions.

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