During the global financial crisis that climaxed in March 2009, bank stocks gave investors a thrashing. Many folks swore they would never own a bank again. In the investment ballgame, though, it’s wise never to say “never.” Bought at the right time and price, even bank stocks can ring up handsome profits.
Right now, shares of some of the world’s largest — and safest — banks offer an enticing combination of generous dividend yields and wide appreciation potential. The really worthwhile upside belongs to certain overseas banks. You’ve got to be choosy, of course. I’m not interested in Spanish or Italian banks, for example, regardless of their recovery prospects. The risk of a collapse, should European policymakers misstep, is simply too high.
On the other hand, I’m finding excellent values among the British and Australian banks. After the 2008 debacle, the U.K. forced its banks to raise capital and shed high-risk businesses. As a result, U.K. banks, as a group, are now considerably stronger than before the crisis hit. Meanwhile, the Australian banks, which never got into the same degree of trouble as their U.S. or British counterparts, have prudently bolstered their capitals anyway.
High Yields, No Tax
I’ve got another reason for favoring British and Aussie banks, too. You guessed it: dividends. In a world of skimpy yields on both stocks and bonds, some of these banks are paying well above 5%. Better yet, the U.K. imposes no withholding tax on dividends paid to U.S. investors. So, you can tuck British bank stocks into your IRA without losing any income to the tax collector.
Australia, in theory, continues to have a withholding tax. If, however, a company pays income tax at the normal 30% Aussie rate, the dividend is considered “fully franked” and thus exempt from withholding tax. In other words, as long as an Australian corporation is solidly profitable (most banks are), you don’t have to worry about the withholding tax on dividends.
Here are two bank stocks from across the pond and one from across the world that are all winning:
Barclays PLC (ADR) (BCS)
Barclays PLC (ADR) (BCS) is a leading British bank and the country’s second largest by assets. Barclays provides a compelling play on dividend growth.
At the current dividend rate, based on the past four quarters’ payouts, BCS stock yields only 2.8% — barely more than a typical U.S. megabank.
Right now, however, Barclays is doling out only about 25% of its projected 2015 earnings in the form of dividends, leaving plenty of room for an increase. In late February, I expect Barclays’ directors to declare a substantial boost in the year-end payout.
That hike, in turn, will likely signal the onset of a period of rapid dividend growth over the next three or four years. By 2019, I think it’s quite possible Barclays’ dividend will have doubled from today’s level. The BCS share price may climb almost as far.
HSBC Holdings plc (ADR)(NYSE:HSBC)
HSBC Holdings plc (ADR) (HSBC) is the parent of the venerable Hongkong & Shanghai Bank, which dates back to 1865. HSBC relocated its headquarters to London before mainland China took over Hong Kong in 1997.
Thanks to its far-flung operations, HSBC now ranks first in assets among U.K. banks (a staggering $2.7 trillion) and second only in the world to Industrial & Commercial Bank of China.
Such enormous size makes it difficult for HSBC to grow much faster than the global economy. However, HSBC’s sprawl also reflects unparalleled diversification and stability. Although the dividend still hasn’t fully recovered from the cut in early 2009, HSBC directors have sweetened the payout four years in a row, and I expect a fifth annual raise in March.
Like Barclays, HSBC typically issues three quarterly dividends at the same rate (in July, October and December) and a variable April dividend that reflects the previous year’s results. Amounts are declared in U.S. dollars, so you don’t have to factor in exchange-rate fluctuations (as you do with Barclays’ dividends). Current yield, based on the past four quarters’ payout: 5.2%.
Westpac Banking Corp (ADR) (WBK)
Westpac Banking Corp (ADR) (WBK) is the oldest Australian bank (founded in 1817) and the only one with a Big Board listing. WBK boasts (U.S.) $627 billion of assets, placing the institution second in its home country and ahead of all but a handful of U.S. banks.
Among the Australian Big Four banks, Westpac stands out for its frugal management (lowest expense-to-income ratio of the four) and solid balance sheet (high capital ratios, modest levels of bad loans).
For us, though, the dividend is WBK stock’s great attraction. At today’s price, Westpac is throwing off a luscious 5.7% yield, based on the two most recent semiannual payouts. Westpac did briefly cut its dividend during the crisis but got back to a record pay rate by 2011.
Over the next decade, with normal dividend growth, I figure your yield on today’s cost will approach 9% — far above anything you could hope for with a government bond. Retirees and aspiring retirees, take note!
As with any foreign stock, WBK stock’s price (quoted in dollars) will feel some impact from fluctuations in the exchange value of the bank’s home currency, the Australian dollar. Currency swings will also affect the dollar value of your dividends.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won nine Best Financial Advisory awards from the Specialized Information Publishers Foundation.