When I was a much younger man and first starting out in the financial industry, bank stocks were thought of in the same classification as utility stocks. They were considered nice, safe widow-and-orphan dividend stocks.
As the industry has changed over the years that definition has changed several times. Bank stocks were actually viewed as growth stocks for much of the 1990s as the changes in interstate banking laws opened up all sorts of opportunities for expansion-minded financial institutions.
In the first decade of this century banks rode the wave of cheap money to again become more of an earnings growth story than dividend-paying income stocks.
Now that we have been through the financial crisis and banks are de-risking their balance sheets, income investors can once again look to select bank stocks as serious candidates for a growth and income portfolio.
During the crisis many banks reduced or even laminated their payouts, but as credit conditions have improved they have been reinstated and we should see strong dividend growth from this sector over the next several years.
People’s United Financial, Inc. (PBCT) is a good example of a dividend-paying bank worth consideration by income-seeking investors. The Connecticut-based bank has 410 branches throughout New England with about $34 billion in branches. Credit conditions have improved steadily over the past three years and nonperforming assets are just 1% of total assets right now.
Over the past five years People’s United has been able to grow earnings at more than 10% and should show solid growth going forward as the economy continue to improve. At the current price the stock is yielding 4.54% and it is not unreasonable to assume that the dividend will grow at a steady pace over the next decade.
Oritani Financial Corp. (ORIT) is a New Jersey-based bank that has 26 branches and just more than $3 billion in total assets. As banking conditions have improved this bank has been generous in raising the dividend to reward shareholders.
Over the past five years dividend payout has grown by 22% a year on average. Over that time the dividend has gone from 7.5 cents a share to 17.5-cents per share on a quarterly payout. At the current price the shares yield 4.77%.
Management also announced a year-end special dividend of 25 cents. I would expect dividend payments in the future to grow at a double-digit rates as banking industry conditions continue to improve.
Regional and community bank stocks should be one of the best growth and income sectors for the next several years. Many of them have attractive yields at the current price and the prospects for dividend growth in the sector are outstanding.
As of this writing, Tim Melvin does not hold a position in any of the aforementioned securities.
