You wouldn’t know it from looking at their yields today, but financial industry stocks used to be known as some of the most reliable dividend-payers around. In 2007, Bank of America Corp. (BAC) paid $2.40 a year in dividends for an average yield of roughly 5%. Today, the stock pays one cent a quarter and yields half a percent. Citigroup (C) also pays one cent a quarter (up from nothing in 2010) today; but in 2007 Citi paid a dividend of $5.40 a quarter, for an average yield of over 4%.
Income investors who could once rely on the big banks for steady income have had to look elsewhere. But there are still some banks that make good income investments — you just have to look a bit further afield for them. I’ll make it a little easier though — in today’s Investment of the Week, I’m sharing three dividend-paying bank stocks from recent issues of the Dick Davis Dividend Digest.
The first is a regional bank, recommended by Stephen Mauzy in Ian Wyatt’s High Yield Wealth. Regional banks are the little-noticed good guys who’ve continued to play by the rulebook amid the ongoing vilification of Wall Street. They take deposits, make loans, and never report $2 billion trading losses. Many of them are too small to pay significant dividends, but the one Mauzy recommends currently yields about 3.5%. Here’s part of his write-up:
“Texas-based Cullen/Frost Bankers, Inc. (CFR) has a long history of profitable, rewarding banking, and it continues to extend that history. This A+ rated bank — one of the highest-rated in the nation — reported net income of $61 million, or $0.99 a share, for the first quarter of 2012. That’s a 17.5% increase over the $51.9 million, or $0.85 a share, reported a year ago. The dividend has kept pace with earnings growth. In fact, the quarterly dividend was recently increased to $0.48 per share, marking the 18th consecutive annual increase. The higher payout rate pushes the yield up to 3.3%. I expect to see many more dividend increases in years to come, given that Cullen/Frost is one of the most conservative and one of the most ably managed banks in the county. ... Income investors put off by Wall Street’s never-ending shenanigans should look to Texas for rising dividends and earnings. Buy CFR.”
A second option is to look north to Canada. The Canadian financial system’s relative conservatism saved it from much of the carnage of the U.S. financial collapse. Bank of Montreal (BMO) is still paying the same 70-cent per quarter dividend it paid in 2007, for a current yield of about 5%. And BMO is listed on the NYSE, making it easy for U.S. investors to buy some. Here’s a recent recommendation of BMO from Patrick McKeough’s The Successful Investor.
“Bank of Montreal (BMO) is Canada’s fourth-largest bank, with assets of $538.3 billion. Bank of Montreal continues to profit from last year’s purchase of U.S. banking firm Marshall & Ilsley Corp. for $4 billion in stock. That more than doubled the number of branches Bank of Montreal operates in the U.S. It also added two million customers. The bank now gets 20% of its revenue and earnings from its U.S. retail banking operations.
“Meanwhile, the bank’s earnings rose 19.3% in the quarter ended January 31, 2012, to $953 million from $799 million a year ago. Earnings per share rose 7.6%, to $1.42 from $1.32, on more shares outstanding. These figures exclude unusual items, such as costs to integrate the new U.S. operations. The higher earnings were entirely due to Marshall & Ilsley’s contribution (earnings at the U.S. banking division soared 161.0%). That offset weaker contributions from its Canadian banking, wealth management and capital markets divisions.
“Even with the new operations, the bank set aside just $141 million to cover bad loans in the latest quarter. That’s down 56.3% from $323 million a year ago. Revenue rose 18.7%, to $4.1 billion from $3.5 billion. Bank of Montreal will probably earn $5.68 a share in 2012. The stock trades at 10.2 times that forecast. The $2.80 dividend yields 4.8%. Bank of Montreal is a buy.”
Lastly, the third option is to look even further afield: to emerging markets where growing economies and burgeoning middle classes are driving financial sector profits. Yiannis G. Mostrous, editor of Global Investment Strategist, recommended this Brazilian bank last month:
“Brazil’s Banco Bradesco SA (BBD) reported first-quarter results, with net income up 2.7% quarter-over-quarter to $1.5 billion, on track to meet its 2012 targets. The bank reduced personnel and administrative expenses by 7.9% QoQ, while net interest income grew by 4.3% and net interest margins (NIM) remained flat. Fee income grew 0.8%, mainly driven by better assets-under-management fees.
Negative developments included low loan growth of 0.4%, because of weaker economic activity, and an increase in the non-performing loans (NPL) ratio. However, the bank’s NPL coverage ratio is 147%, still a comfortable level. The company expects the NPL ratio to remain flat in the current quarter and improve in the second half of the year. In the context of weak economic activity in Brazil during the first quarter, BBD’s results were solid. The country’s economy should pick up in the second half of the year, making BBD’s shares a good buy. [BBD] trades at less than nine times trailing earnings and 1.7 times book value while offering a 20% return on equity. Investors also will receive a 3.9% dividend yield. Banco Bradesco is a buy up to USD20.”
Wishing you success in your investing and beyond,
Chloe Lutts
Editor of Investment of the Week
