You can bet bank stocks for stable dividends. Here are 4 with returns above 3%


Regional banks like M&T offer solid dividends to income-hungry investors. Here, an M&T branch in Elmsford, NY, earlier this year.

Tiffany Hagler Gear / Bloomberg

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This year’s rally in bank stocks appears to have slowed, but investors still have reason to stay: reliable dividends from banks at a time when income investors are short of attractive opportunities.

Take a look at last week’s fluctuations in the bond market. The yield on the 10-year Treasury bill fell below 1.2%, its lowest level since mid-February. While this drop in yields also hurt bank stocks, the

SPDR S&P Bank

exchange-traded fund (ticker: KBE) down 3.5% on Monday, the ETF’s yield was 2.3%, providing investors with both a regular payout and an opportunity for appreciation.

It makes sense to think of bank stocks as an income game in today’s environment. Even though Treasury yields rebounded from their early week lows, there is still little money to be made with a return of 1.29% on Friday morning. Some investors may be tempted to exploit the high yield market, but the returns are not great for the assumed level of risk. the

SPDR Bloomberg Barclays High Yield Bond

The ETF (JNK) currently returns 4.6%, and while companies have weathered the pandemic well, historically low returns from non-investment grade companies may not justify the default risks that come with these bonds.

Enter the banks. Not only did the sector come out of the pandemic largely unscathed, but the largest banks also underwent three of the Federal Reserve’s stress tests in a 12-month window – one more than usual – to further prove their worth. durability.

Bank / Teletypewriter Price change since the beginning of the year P / E ratio P / TBV Dividend yield
Citizens Financial Group / CFG 22.0% 9.6 1.3 3.5%
M&T / MTB Bank 1.2 11.1 1.6 3.3
KeyCorp / KEY 16.8 9 1.4 3.8
Fifth Third Bank / FITB 30.0 11 1.6 3.0

Note: P / TBV = price at tangible book value

Source: FactSet

The latest test, the results of which were released in June, was of particular interest to income investors. Indeed, passing the test meant that the Fed would ease the pandemic-induced restrictions on distributions of capital to shareholders. Last year, the Fed called on banks to temporarily halt share buybacks and asked them to cap dividend payouts at the average of their quarterly profits for the previous four quarters. The idea was to force banks to hold onto their capital to serve struggling customers during the pandemic.

Without the restrictions, several banks could have maintained or even increased their payouts to investors last year, which is why so many larger banks rushed to announce their plans to increase their dividends soon after the results of the latest stress. test.

Morgan stanley

(MS) and

Wells fargo

(WFC), for example, have both doubled their dividends and are earning 3% and 0.9% respectively.

One way to play banking would be to invest in

ETF SPDR S&P Bank

or the

SPDR S&P regional bank

ETF (KRE) —both return around 2.3%.

But with the rally in bank stocks in a holding pattern – the KBE had risen over 32% and is now up around 16% for the year – it may make sense to do stock picking among the banks. regions, many of which offer returns above 3%.

Citizens Financial Group

(CFG) is one of those banks. It is currently earning 3.5%, but it has a lot more benefits. The bank, based in Providence, RI, recently announced its intention to acquire

HSBC‘s

Its retail operations on the east coast, which will allow it to fill some gaps in its branches in the Northeast and Mid-Atlantic regions while gaining a small foothold in Florida.

And for now, acquisitions seem to be part of Citizen’s strategy, as long as transactions make sense, as the bank seeks to stay competitive in an increasingly digital industry.

Banking “is an extremely dynamic industry with a huge amount of change,” said Bruce Van Saun, CEO of Citizens. Barron. “You have to be very agile and forward-looking, know where things are going and how to position yourself.

M&T Bank

(MTB) is another bank offering a return above 3% – 3.3%, to be exact – that is, in full acquisition. The Buffalo, NY-based bank announced its intention to acquire

People’s United Financial

(PBCT) by the end of the year, a move that will expand its footprint in the Northeast and Mid Atlantic.

Although the bank missed expectations for second quarter earnings, in part due to higher spending, the long-term outlook looks compelling, especially as the bank is trading at a slight discount to its peers. .

“We expect a smooth integration with PBCT with prominent potential synergies over time as well. While the specter of “deal stock” may loom over the short term, the stock starts to get more attractive. [around] 1.6 times tangible book value, ”wrote David George, senior research analyst at Baird on Thursday. Peers are currently trading at 1.8 times tangible book value, according to FactSet data.

KeyCorp

(KEY) gives up 3.8% and stocks are up about 17% this year. In the most recent quarter, results were helped by fee income offsetting lower net profit margins, according to George. Expenses were flat and net expenses were down 0.1%, a sharp drop from the first quarter of 2021 and the quarter a year earlier. George calls the risk-reward trade-off balanced, noting that the Cleveland-based bank is well equipped to navigate the low rate environment for the next few quarters depending on the strength of its investment bank.

Fifth Third Bancorp

(FITB) is another bank well equipped to navigate the world of low interest rates, having seen its net interest income increase 2.7% from the first quarter of 2021. It plans to increase its dividend by 3 cents in the third quarter and repurchase $ 850 million of shares in the second half of 2021. Shares of the Cincinnati-based bank are returning 3%.

With bank stocks changing little now as investors navigate the impact of low bond yields and a lukewarm climate for loan growth, there are at least some opportunities in the industry where investors can be paid to wait.

Corrections and amplifications

Fifth Third Bancorp is based in Cincinnati, Ohio. An earlier version of this article incorrectly said Alabama.

Write to Carleton English at [email protected]

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