The financial sector was one of the worst areas to invest for income during the 2007 to 2009 period, as many names were forced to cut their dividends to the minimum while companies dealt with the financial crisis. For income investors, the dividend cuts were painful and have caused many to avoid the sector for fear of more pain in the future. Even as we are more than a decade removed from the time period.
That said, many companies in the financial sector are now better equipped to handle adverse economic conditions. Their business models also make them more insulated from rising interest rates, as higher rates can actually be a tailwind for these companies. This means that the dividends should be more secure than they were just prior to the Great Recession.
This article will examine three financial stocks in the financial sector that have safe dividends yields of at least 3%.
Bank OZK (OZK)
The first name to consider is Bank OZK (NASDAQ:OZK), which was previously known as Bank of the Ozarks. The $5.4 billion company has generated annual revenue of more than $1 billion over the last year.
Bank OZK offers a variety of financial services, including checking, savings, money market, time deposit and individual retirement accounts. The bank offers real estate, consumer, commercial, industrial and agricultural loans as well as leasing services to customers.
The company has several advantages working in its favor. Despite its regional bank status and relatively small number of branches of approximately 240, Bank OZK is ideally located in some of the most populous states in the U.S. This includes California, Florida, New York, North Carolina and Texas. This provides for a rather sizeable pool of potential customers and clients.
Unlike many in its sector, Bank OZK performed well during the 2007 to 2009 period, with earnings per share (EPS) growing more than 15% during the time frame. The company reached a then-record in 2009 as well, an impressive accomplishment given the turmoil of the time for those in the financial sector.
Despite the Federal Reserve signaling that its recent aggressive interest rate hikes are likely to continue as long as inflation is high, Bank OZK may not be negatively impacted. In its second-quarter report, management noted that demand for loans was down only 1% while net interest margin expanded 27 basis points to 4.5% on a sequential basis. Net interest income was up 7% for the period.
Bank OZK has long been a shareholder friend company, as it has raised its dividend for 26 consecutive years, often aggressively. The dividend has a compound annual growth rate (CAGR) of more than 18% over the last decade. And while most companies raise their dividend once per year, Bank OZK has now raised its dividend 49 consecutive quarters.
Shares of the company yield 3.1%, 100 basis points higher than the 10-year average yield of 2.1% and well above the 1.7% average yield for the S&P 500. Bank OZK has a projected payout ratio of 31%, only slightly ahead of its long-term average of 28%.
Morgan Stanley (MS)
Next is Morgan Stanley (NYSE:MS), which is a financial giant with a market capitalization approaching $136 billion. The company had revenue of more than $61 billion in 2021.
Morgan Stanley offers financial products and services to individuals, corporations, financial institutions and governments around the world. The company operates three segments: institutional securities, wealth management and investment management.
The company has a worldwide presence, giving it a size and scale that only the largest of financial institutions can replicate. This lessens the number of major competitors that it has for its business. At the end of last year, Morgan Stanley had a total of nearly $5 trillion in assets under management, a figure only a few other wealth management firms could top.
Morgan Stanley did not perform well during the Great Recession, as EPS swung from $2.43 in 2007 to a loss of 93 cents in 2009. The company did recover the very next year but did not establish a new high for EPS until 2021.
Even so, Morgan Stanley appears better prepared to handle adverse economic conditions. For example, the company saw a materially benefit from higher interest rates in its second quarter, as net interest income grew 39% to $1.75 billion. The selloff in the markets as a result of higher inflation and higher interest rates did lead to a 55% decrease in the investment banking business, but the flight to safer securities drove a 49% gain in fixed income for the company.
Like many others, Morgan Stanley slashed its dividend in both 2009 and 2010. The dividend was held constant until 2014, when the company began raising its dividend once again. Growth has been aggressive as the dividend has a CAGR of almost 24% over the past five years. The dividend growth streak stands at nine years.
Shares of Morgan Stanley yield 3.9%, which compares very favorably to the average yield of 1.9% since 2012. It’s also more than twice what the market offers. The projected payout ratio of 48% for 2022 is elevated relative to the long-term average of 23%. However, it’s not to a level where a dividend cut appears imminent.
In addition, share buybacks have been plentiful. The company bought back $2.7 worth of stock during the most recent quarter. The share count has been reduced by more than 6% in the last year alone.
Old Republic (ORI)
The last of these financial stocks to consider is Old Republic (NYSE:ORI), which provides insurance to both individuals and institutions. The company has a market capitalization of $7.1 billion and annual revenue of close to $8 billion.
Old Republic markets, underwrites and offers risk management services for a variety of general and titles insurances. The company has three reporting segments, including general insurance, title insurance and a run-off business.
Old Republic’s products include automobile extended warranty, commercial auto, workers’ compensation, financial indemnity and title insurance. The company sees almost all of its revenue from the U.S., but some comes from Canada. This helps to reduce the impact of currency exchange on results.
Though insurance is often viewed as a boring industry, results can be volatile depending on the number of claims a company has. Old Republic is no different. EPS have fluctuated over the last 15 years. This includes during the financial crisis. Old Republic had EPS of 97 cents in 2007 followed by EPS losses of 81 cents in 2008 and 67 cents in 2009. These losses continued for several years following the Great Recession and didn’t return to growth until 2013.
Rising interest rates have already impacted mortgage refinancing activity, though Old Republic’s combined ratio of 91.4% in the second quarter was solid.
Despite unevenness in its business, Old Republic has an impressive dividend growth streak of 41 years. The last decade has seen a dividend CAGR of 2.4% as the company has a been a slow but consistent grower of its distributions to shareholders. The stock yields 4%, which is slightly below its long-term average of 4.5%. Still, this is more than twice the average yield of the market index. The projected payout ratio for this year of 36% is below the 10-year average payout ratio of 53%.
On the date of publication, Bob Ciura did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.