Citigroup (C) stock has a dividend yield of nearly 3.4%, which is not only over twice what the average S&P 500 Index ($SPX) constituent pays, but is also ahead of its banking peers like Bank of America (BAC) and JPMorgan Chase (JPM), which yield below 2.5%. While bank stocks generally have a higher dividend yield, Citi specifically stands out for its fat payouts. 

Along with the current dividend yield, investors should also be mindful of the future growth in dividends – not to mention the expected growth in capital. A lot of stocks with high dividend yields turn out to be duds when it comes to price appreciation, and end up underperforming the markets after accounting for total returns.

In this article, we’ll discuss the expected growth in Citi's dividend payout, and analyze whether the stock can also deliver decent capital gains over the next couple of years. 

Goldman Sachs Expects Citi to Grow Its Dividends by 20%

During the Q2 earnings call, Citi announced that it would increase its quarterly dividend by 6% to $0.56, which implies a forward dividend yield of 3.4% at current prices. The company’s quarterly dividend payout has grown at an annualized pace of a mere 1.9% over the last five years. However, that’s partly due to the restrictions that the US Fed placed on banks' dividends and share repurchases during the COVID-19 pandemic.

Citi’s quarterly payout was static at $0.51 per share for nearly four years before it was hiked to $0.53 in mid-2023. Goldman Sachs expects the bank to grow its dividend at a CAGR of 19% between 2024 and 2026, which looks quite healthy and implies a 2025 dividend yield of around 4.2%.

It's also important to look at the payout cover, as it helps us gauge the sustainability of the dividend. According to Goldman Sachs, Citi’s dividend cover is 3x based on 2025 numbers, which happens to be the second-highest among the companies on its list of dividend growers.

Simply put, Citi has an attractive dividend yield, and is expected to grow dividends at a brisk pace over the next couple of years. With the dividend sorted, let’s see whether the stock can also deliver capital appreciation over the next couple of years.

Bank Stocks Look Well-Positioned

Bank stocks were out of favor with markets for the last couple of years. Investors loaded up on tech stocks as they were delivering stellar returns, and as a result, many other sectors of the market were overlooked. Fears of a U.S. recession also made investors wary of bank stocks, as they tend to underperform in a recessionary environment.

However, the recent bank earnings have dispelled these fears, after both Wells Fargo (WFC) and JPMorgan Chase impressed markets on Friday with their Q3 earnings. Citi also released its Q3 earnings today before the bell, featuring a solid beat on earnings and revenue. The general outlook for the banking sector is looking up as the market rally becomes more broad-based and non-tech stocks also play catchup.

Citi Stock Looks a Turnaround Play

Citi – and by extension its stock price – looks like a pale shadow of its past, and the stock is down 85% over the last 20 years. The bank has been plagued by multiple issues – including regulatory headwinds – and is a long-term underperformer.

In 2020, Jane Fraser became Citi’s CEO, and has since been trying to turn around the bank. As part of the transformation, Citi announced its exit from consumer banking in several international markets, laid off employees, and simplified the management structure to make the company a lot more agile and transparent.

Citi expects its cost-cutting measures to lead to annualized cost savings between $2 billion to $2.5 billion. It is working to improve its return on total capital employed (ROTCE) to between 11%-12% over the medium term, versus the 7.0% that it reported in Q3.

Citi Could See a Valuation Rerating

Citi’s low margins and return ratios have meant that the stock trades at a much lower valuation than its large-cap banking peers. For instance, it trades at a next 12-month (NTM) price-to-earnings (PE) multiple of 10.9x, while the corresponding numbers for Bank of America and JPMorgan Chase are 12.6x and 13.69x, respectively. 

Even Wells Fargo, which has often been in the regulatory crosshairs, trades at an NTM PE multiple of almost 12x.

For banks, however, the price-to-book multiple is the preferred metric, and a multiple below 1 is seen as a sign of undervaluation. Citi has a price-to-book multiple of 0.66x, while WFC and BAC trade at twice that multiple. JPM has even richer multiples, with a price-to-book ratio of 2x. Citi had a tangible book value of $87.53 at the end of June, and the value should rise gradually every quarter. The stock trades even below this tangible book value, which signals undervaluation.

Last month, Wells Fargo bank analyst Mike Mayo named Citi as a top pick in the banking sector, and argued that the stock could double over the next two and a half years just by rising to its tangible book value. While Citi stock has risen from those levels, it could still deliver strong returns if it just rises to its tangible book value. However, the company will need to show more tangible results in its transformation, and the valuation reset will be contingent upon the improvement in its margins and return metrics.

All of that said, I find Citi’s risk-reward attractive, and the stock could fit into the portfolios of investors who want a high-yielding dividend stock that’s also expected to boost its payouts significantly over the next couple of years.