As most dividend investors in financials have noticed by now, apart from real estate investment trusts (REITs), dividends from banks and insurers are pretty paltry.
Fortunately, that’s about to change.
Bank dividends are still suffering from the hangover from the financial crisis when they and their capital plans were put under strict federal scrutiny. Furthermore, bank profitability is getting squeezed by the Fed’s ultra-low interest rate policy.
Insurance companies were likewise bruised by the financial crisis and came under closer supervision from the Fed. At the same time, record-low interest rates hurt profitability.
That being the case, investors need to be patient in waiting for dividends among the financials to take off — but next year should be it. Everything remains in order for the Fed to raise short-term rates in 2015, and that will be a boon for financials’ profits.
Strong financials with relatively high dividends promise both dividend hikes and price appreciation, but they’re best bought now, well ahead of the rate hike. The dividend yield on a stock declines as shares rise, meaning success on price can offset even a rising dividend.
But size and health are critical, which is why we scoured the S&P 500 for big banks and insurers paying sector-high dividends. No, these aren’t amazing yields, but they are solid and offer a great way to get ahead of the rate hike. Here are three of our favorite financials.
Financials With Solid Dividends — JPMorgan Chase & Co. (JPM)
JPM Dividend Yield: 2.8%
JPMorgan Chase (JPM), the nation’s biggest bank by assets also pays the biggest dividend of all U.S. money center banks. Even more importantly, JPMorgan is good for it. Even after a trading fiasco and billions in legal fees and fines, the bank’s balance sheet remains rock solid.
True, the market’s October correction has pushed JPM stock into the red for the year-to-date, but that also sets it up for big gains once the trend reverses. After all, JPM is really cheap, going for less than 10 times forward earnings (P/E) and sporting a price-to-book ratio B/P of just 1.
Most importantly for dividend investors in financials, JPM has plenty of room to raise its dividend. The payout ratio stands at just 29%, and free cash flow grew 14% to $29 billion in fiscal 2013.
Finally, JPMorgan remains eager to return cash to shareholders. In 2010 under Fed restraints, JPM paid only $1.5 billion in dividends. Last year, that number rose to more than $6 billion.
Financials With Solid Dividends — MetLife, Inc. (MET)
MET Dividend Yield: 2.8%
Tougher capital requirements, low interest rates and the threat of being slapped with the too-big-to-fail designation are weighing on insurance industry dividends. But it is possible to find big companies with good, if not exactly great, payouts.
MetLife (MET) has by far the highest dividend among large-cap insurance companies. Knocking on the door of 3%, the life- and health insurer’s dividend has likewise been climbing since being slashed in the financial crisis.
MetLife is fighting the federal government’s proposed designation of being “systemically important,” and it refuses to buy back stock until the question is settled. But that risk is more than discounted in MET stock by now. With a price-to-book ratio of 0.8 and a forward P/E of less than 9, MET is a bargain. Additionally, the company is shedding risk, cutting back on annuities and dumping long-term care insurance.
Like JPM, MetLife has plenty of room to raise its dividend. The payout ratio comes to only 30%, and there’s plenty of free cash flow to go around. MET paid out $1.2 billion in common and preferred dividends last year while generating more than $16 billion in free cash flow.
Financials With Fine Dividends — Wells Fargo & Company (WFC)
WFC Dividend Yield: 2.8%
Wells Fargo (WFC), the nation’s largest bank by market value, has been a market darling throughout the bull market. Its share-price performance of a nearly 300% gain since the bear-market bottom has crushed the S&P 500, as well as all of its big-bank competitors.
Avoiding most of the carnage of the financial crisis — and with some help from an incrementally healthier domestic economy — WFC pays the highest dividend off all big-bank stocks, and there’s ample reason for it to lead the pack after a rate hike.
After all, WFC has a clean balance sheet and generates an industry-best return on capital. It also has the highest profit margins among big-bank stocks. Just as key, the mortgage business — WFC’s bread-and-butter — is growing again after a year-long slump. Yes, a rate hike could slow mortgage originations again, but that will be more than offset by rising net interest margins.
Finally, WFC has plenty of resources to raise its dividend at will. The payout ratio stands at 32%. Last year, the bank paid out $7 billion in dividends and still had free cash flow of $57 billion.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.