This bank is innovating with the help of its Laurel Road digital banking platform. It has a current dividend yield of 3.58%, paid quarterly.
KeyCorp (KEY)
From Contrarian Outlook
Fed Chair Jay Powell’s overheating money printer has been great for our portfolios—it’s sending our dividend stocks through the roof! But where the heck do we invest new-found gains for further payouts?
I know I don’t have to tell you that this inflated market has clobbered dividend yields (as yields move in opposition to prices), but there are still bargain-priced dividend payers out there, some throwing off recession-proof payouts yielding over 6%!
Last week, we talked about one “Fed-fueled” corner of the market—energy stocks like ExxonMobil (XOM), payer of a gaudy 6% payout itself. It’ll thrive as inflation climbs, driving up oil prices. Oil (and Exxon’s profits) will get an assist from rebounding demand, which is squeezing producers, who are racing to reopen the wells they shuttered during last year’s lockdowns.
Now let’s delve into another Fed-driven stock investments. This company starts you off with a decent dividend payout, but thanks to its incredible dividend growth, you could easily see the yield on your original buy pop to 9% or more over the coming decade!
A Regional Bank With “Spring-Loaded” Dividend
Banks live by the “yield curve,” or the difference between the federal funds rate (at which banks lend to each other) and the yield on the 10-year Treasury (which governs the rates at which banks lend to you and me).
The 10-year rate has recently corrected, which has weighed on banks’ share prices—and set up our opening. If this rate reverses and heads higher, as I anticipate it will, it will be an additional catalyst for bank profits, share prices and dividend growth.
Washout in the 10-Year Rate Opens Our Buy Window
You can see the correlation between the 10-year Treasury rate and regional banks pretty clearly in this chart, which uses the SPDR S&P Regional Banking ETF (KRE) to represent shares of smaller banks.
And smaller lenders are the best place to hunt for undervalued dividend payers (and growers) in the financial space. Consider KeyCorp., whose roughly 1,000 branches are mainly in Ohio and New York. It starts us off with a nice yield, plus a payout that’s surged an incredible 517% in the last decade.
The numbers behind that dividend growth are staggering: if you bought KeyCorp 10 years ago, you’d be yielding 9.4% on your buy now!
And with the bank’s payout occupying just 35% of net income, it’s got plenty of room for further growth, and that’s before accounting for any rise in its loan income due to an increase in rates.
Finally, there’s the valuation: KEY trades just a hair above book value (1.18-times, to be exact), or what its physical assets would be worth if they were sold off. That means we’re getting KeyCorp’s banking business for next to nothing. The historically low P/E ratio of 8.5 is further proof of the stock’s value.
Brett Owens, Contrarian Outlook, BNK Invest Inc., 500 North Broadway, Suite 265, Jericho, NY 11753 USA, 516-620-4294, August 10, 2021