Prospects for income often attract investors to financial stocks. These investors look for a steady income, a significant yield, and of course, to protect their initial investment.
At first glance, many may want to turn to real estate investment trusts (REITs) to achieve such a goal. Indeed, the requirement that they pay out at least 90% of income as dividends appeals to their owners at first glance. However, the 90% requirement also leaves little savings to maintain a dividend during lean times.
If income falls — or goes away completely — REITs have to slash the dividend in most cases. Hence, investors should also look for financial stocks that earn steady cash flows and enjoy some degree of flexibility to maintain their dividend through more challenging times.
The banking and asset managers live under no such restrictions. Most earn steady cash flows through issued debt requiring steady streams of income. These financial firms also can maintain enough flexibility to pay dividends or strengthen their balance sheet if cash flows become disrupted.
The following three financial stocks offer both high returns and flexibility:
Golub Capital BDC Inc (GBDC)
Golub Capital BDC Inc (NASDAQ:GBDC) is a New York-based investment management company. The firm acts as a business development company, serving as a credit asset manager. It currently manages over $25 billion in assets. GBDC helps to fund middle-market companies and private equity firms that back those companies.
Investors in financial stocks will like the current dividend yield, which stands at about 6.9%. The current dividend accounts for the fact that this year, the company reduced the annual dividend back to the 2015 level of $1.28 per share.
Income derives the majority of benefit from this stock. However, the stock price has risen slowly since its IPO in 2010. The stock fell as low as $13.65 per share that year. Eight years later, the stock trades around $18.60. While this stock will not make one rich, it performs the job of preserving and gradually increasing the initial investment. The stock price has fallen from over $20 per share a year ago.
It now trades at a price-earnings ratio of about 15. Its price-book ratio stands at about 1.15. Given these low valuations, buyers at this level will likely enjoy some capital appreciation in addition to the dividend income.
Oritani Financial Corp. (ORIT)
Oritani Financial Corp. (NASDAQ:ORIT) acts as a holding company for Oritani Bank. Based in Washington, New Jersey, this financial services firm provides retail and commercial banking services to both individuals and businesses.
The extreme bearishness seen in early 2009 took the stock to the $6 per share for a short time. However, it has remained in the double digits since 2010. Today, it trades at around $16 share. Like with most stocks in this category, investors should not expect massive gains. Still, ORIT stock has done a great job at both preserving and slowly growing initial investments.
Like with many financial stocks, the majority of one’s return will likely come from the dividend. In fact, the dividend yield has made being an investor in ORIT stock more lucrative from a cash perspective than being a depositor at Oritani (or any other) bank. At an annual dividend of $1 per share, the yield stands at about 6.25%.
This dividend has fallen from the $1.20 per share level of two years ago. However, the dividend has increased substantially from the annual dividend of 18 cents per share that it introduced in 2009. The dividend cut helped keep the dividend in line with net income, which fell to $1.10 per share in 2017. Analysts predict the firm’s net income will remain close to current levels for the next two years. Hence, the dividend should remain stable for the foreseeable future.
Main Street Capital Corporation (MAIN)
Main Street Capital Corporation (NYSE:MAIN) offers both debt and equity financing to middle-market companies. The Houston-based asset management firm funds buyouts, recapitalization and acquisitions of companies in several different investment sectors. Fees, commissions and interest make up most of its income sources.
Regarding appreciation, MAIN stock has become a winner. After a steady climb from a low of just over $8 per share in 2009, the stock today trades at around $38 per share. However, that price also makes MAIN a more expensive stock in this category. Its forward PE stands at approximately 15.6. Its five-year average for its PE is just over 13.5. Hence, the valuation could have moved slightly ahead of itself.
The dividend might justify the risk of the slightly higher multiple. MAIN stock pays an annual dividend of $2.28 per share. This gives the stock a dividend yield of over 5.9%. This includes the fact that MAIN saw its first dividend cut since 2009 this year. The dividend had risen every year before and stood at $2.79 per share in 2017.
If the stock’s history gives any indication, dividend increases could resume next year. Moreover, though investors will pay more for this financial stock, its history of appreciation while maintaining a strong dividend still makes MAIN stock an excellent choice.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.