Many income-focused investors are so blinded by the big dividends and big price returns of traditional income-equities such as REITS and utilities stocks, that they are completely overlooking the big dividends, low risk, and price appreciation potential of the big bank stocks. For some perspective, the following charts shows the recent and historical total returns of various big banks versus a variety of industry benchmarks such as utilities, REITS, financials and the S&P 500.Â
The table helps highlight the extent to which investors have preferred traditional big-dividend low-volatility investments like utilities and REITS, and the extent to which financials have sold off. In our view, now is a great time to consider some of the big dividend paying financial stocks because their risks have been dramatically reduced in recent years, and some of them are currently trading at very attractive valuations. Specifically, the recent Federal Reserve stress tests have added credence to the increased safety, and the Brexit-induced sell off has helped increase the attractiveness of current valuations. For your consideration, below we have highlighted some of the big dividend banks we do NOT like, some of the big dividend banks we do like, and provided information on the big dividend banks we own. For reference, here is an expanded version of the previous table:
Total returns data as of 6/30/2016.
Big Bank Dividends We Do NOT Like…
Bank of America (BAC)-We acknowledge that some more aggressive risk-taking investors may find this stock attractive, but Bank of America is an example of a big bank stock that we do NOT like. For starters, its price to book is low because the bank still carries many distressed assets on its books left over from the financial crisis. Also, it earns a return on capital that is lower than its cost of capital suggesting it destroys value with each new investment it makes. And even though Bank of America’s payout ratio is expected to rise following the latest round of Fed stress tests, it’s still lower than peers like Wells Fargo and JP Morgan, and we are not comfortable that it can be increased to similar levels anytime soon. You can read out full Bank of America Report here: Bank of America Report
