Finding bank stocks that pay dividends is easy. Finding bank stocks that belong in your portfolio is more challenging.
If you want to add bank stocks that pay dividends to your portfolio, you have a nearly unlimited selection to choose from. From major global banks to regional powerhouses, dividends are easy to come by. But in the financial world, there are plenty of things that are easy to come by that you probably don’t want anything to do with. Credit card debt, high-interest car loans, and a home equity loan to pay for that boiler that just gave out are only a few that come to mind.
These loans all put money into the banking system. So the really condensed version of the story is that when we aren’t spending money, the banks aren’t making money. That volatility is reflected in the stories we’ve written over the past several years.
As an example, in late 2016 and early 2017, the Financial Select Sector SPDR ETF (XLF), whose holdings include all six of the biggest U.S. banks, soared more than 26%. By mid-April of 2017, bank stocks fell more than 9%.
In April 2020, JPMorgan Chase (JPM) boasted one of the Dow’s highest-paying dividends at 3.7%. In May 2020, more than a few bank stocks appeared on the list of new 52-week lows for both the NYSE and the Nasdaq.
Move to September 2020 and JPMorgan Chase, along with Citigroup (C), were two big bank stocks that pay dividends that looked to have promising futures. What should you make of all this?
How to find promising bank stocks that pay dividends
Let’s start with some cold facts. The S&P 500 Bank Industry Index is up a 79% in the last five years, versus a 102% gain in the S&P 500. And it’s up 133% in the last 10 years, versus a 207% advance in the S&P 500. So the industry as a whole has consistently underperformed.
It’s important to point out, as well, that while there are ample bank stocks that pay dividends, not all of them do. And in an industry with its share of volatility, it’s the dividend that can mean the difference between investors making money or losing money.
Still, banks will always have a crucial role in the economy. And even with some volatility, individual bank stocks that pay dividends can hold an important place in an investment portfolio. One example is Bank of America (BAC). Bank of America is one of the largest financial institutions in the world. It’s massive, with more than $2.8 trillion in assets.
BAC spent much of the last decade recovering from the hangover from the financial crisis, and its own ill-conceived acquisitions. It has honed its operations and become much leaner and meaner.
BAC has a considerable scale and scope, with a massive retail banking network, a significant presence in credit card issuance, top commercial operations, and a top-notch investment bank. The wide moat gives the bank huge advantages in costs and switching costs for existing customers.
You might also go with JPMorgan Chase, America’s largest bank by assets and market value. It is also the most profitable big bank with $1.7 trillion in deposits. In 2019 it delivered a 15% return on equity, which pulled back to 11% in 2020 amidst the pandemic economy.
Similarly, Citigroup is America’s third-largest bank, with $2.3 trillion in total assets and more than $650 billion in deposits. Additionally, the company is spending $1 billion to update its risk and control systems.
Which big bank stock will do better going forward is anyone’s guess, which is why you may wish to hold a few in your saddlebag.
Looking forward, you will likely come out ahead on days when the big tech stocks stumble. When that happens, you’ll remember how smart it was to add a couple of rather boring bank stocks to your portfolio.
What is your opinion of bank stocks that pay dividends? Do you hold any of them in your portfolio?