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Some banks' dividends paying more than their CDs

Published May 11, 2003

Call it a sign of the times: Some banks are paying better yields on their common stock than on their certificates of deposit.

Take Bank of America, for example. The annual dividend of $2.56 produces a yield of just under 3.5 percent at the recent price of $74 a share. The best you could do on one of the bank's five-year CDs last week was an annual yield of 2.7 percent, according to numbers posted on its Web site. A one-year CD paid less than 1 percent.

Other bank stocks with dividend yields around 3 percent or a little better include Wachovia, SouthTrust and SunTrust.

So should we all abandon CDs for bank stocks?

No. But both might be part of a diversified, income-oriented portfolio.

The advantage of getting income from stock dividends is that it can grow. Most companies that pay dividends have increased them over the years. Unfortunately, dividends also can be cut, as shareholders of TECO Energy learned recently.

Like other stocks, bank stocks offer the potential for capital gains or losses. Share prices fluctuate in response to an individual bank's performance, the outlook for the industry as a whole and investor interest in stocks. On rare occasions banks even fail, leaving shareholders with nothing.

Declining interest rates helped banks earn record profits at first because deposit rates drop faster than lending rates. But profit margins are now getting squeezed because the interest rates banks can charge new borrowers are so low and rates paid depositors are about as low as they can go, said David Stumpf, who follows the industry for A.G. Edwards & Sons in St. Louis. A small increase in market interest rates probably would help earnings, but investors usually shy away from bank stocks when rates rise, he said. And that could hurt stock prices.

Stumpf said bank stocks also might be left behind if the stock market continues to rally. Some investors who looked at bank stocks as a relatively safe parking place for their money may move on to companies they think will benefit more from an improving economy.

"We're neutral on the group at the moment," he said. "But the dividends are very attractive and since we're coming out of an economic cycle, the risk to dividends is low."

Q. When my husband died, he owed about $15,000 on credit cards in his name. I wanted to try to pay them off as he was a good man and I didn't want his name to be blemished. I took out a loan and paid about $5,000. A man at one card company suggested that I work out a settlement with them, which I did. Another company told me they did not do settlements. Now I have been wondering: Should I just have ignored the debt and not worked out a settlement? Should I have handled my husband's debt in another way?

A. If you were not obligated to pay the debt when he was alive, you are not obligated now that he is dead.

When he died, his debts became an obligation of his estate. If he owned nothing at his death, then the debts would be uncollectible unless there were special circumstances, such as if a creditor claims fraud was involved in transferring assets to someone else (such as a spouse or child).

St. Petersburg lawyer Wm. Fletcher Belcher said this is how the debt collection process works: If an estate goes through probate, creditors file claims against it. If the estate contains enough assets for which there is no special exemption, the creditors get paid. If someone uses a revocable trust to avoid probate, a creditor can open a probate case and seek to have the trust assets brought into the probate estate to pay creditors' claims.

Apparently your husband had no estate other than what you might have jointly owned. Belcher said creditors of an estate go after a joint bank account only if there is a lot of money involved and they think they can prove the money was placed in a joint account to defraud them. Your homestead property is exempt from creditors' claims.

"From a legal point of view, if it was his responsibility and his alone, she shouldn't have touched it or paid it," Belcher said.

Q. Is it possible for the owner of an annuity to pay tax on the deferred interest without withdrawing the money?

No. The interest earnings on an annuity are taxed as the money is withdrawn. That's supposed to be one of an annuity's benefits, so sit back and enjoy the tax deferral you are getting.

- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

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