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By Serkan Unal

Meredith Whitney, a reputed analyst who gained prominence by predicting the subprime mortgage crisis, had been bearish about financial stocks for a while. However, a few days ago, she had a change of heart and is now "shifting to a positive stance on financials." Specifically, she upgraded Bank of America (NYSE:BAC) and Citibank (NYSE:C). She sees new catalysts for the banking stocks in the upcoming Fed's stress test results expected by March next year. Whitney believes the results will say banks are adequately capitalized, allowing them to boost dividends. In particular, Bank of America could quadruple its dividend following the positive Fed stress test results.

In line with the improving market sentiment toward banks and the likely resolution of the fiscal cliff, prudent investors should consider investing in dividend-paying banking stocks. Investors should review the banking stocks with Value Line's highest and above-average safety rankings. These stocks have consistent price stability, moderate volatility, and rock-solid financial strength. In addition to U.S. banks, several Canadian banks boast attractive characteristics, with especially appealing dividend yields. Here is a closer look at five banking stocks, constituents of the Value Line Dividend Index, that pay above-average dividend yields and have a potential for capital appreciation. All five picks have dividend yields above 2% and dividend growth of up to 27%.

Cullen/Frost Bankers (NYSE:CFR) is a $3.4-billion regional bank operating in Texas. It has raised dividends for the past 18 consecutive years. The bank's dividend is yielding 3.6% on a payout ratio of 51%. Over the past five years, the bank's EPS and dividends grew, on average, by close to 1% and 4.3% per year, respectively. Cullen/Frost Bankers' EPS CAGR is forecasted at 7% for the next five years. The bank is trading at a premium to book value and above its peers. It has a strong ROE of close to 10%, well above the U.S. banks' average of 8.86%. Its free cash flow yield is 4.3%. The bank saw robust deposit growth of 13.1% in the third quarter, with loan volumes rising 7.5% and net income growing 7.6% year-over-year. As one of the first banks in the U.S. to turn down TARP bailout funds, Cullen/Frost Bankers remains highly liquid, well-capitalized, and financially sound. It has a low cost of funding, owes very little long-term debt, and operates in vibrant local economies. Billionaire Ken Griffin holds a small position in the stock.

Commerce Bancshares, Inc. (NASDAQ:CBSH) is a bank holding company for Commerce Bank N.A, with operations in Missouri, Kansas, Illinois, Oklahoma, and Colorado. The bank has raised dividends for 44 consecutive years. Currently, the bank has a dividend yield of 2.6% and a low payout ratio of 33%. Over the past five years, its EPS and dividends grew, on average, by 3.1% and 25.3% per year, respectively. The bank's EPS CAGR is forecasted at 7.0% for the next five years. Commerce Bancshares' price-to-book is 1.4, same as for Cullen/Frost Bankers. At 11.8%, its ROE is high for the industry. The bank has a free cash flow yield of 8.8% and no long-term debt. Jim Cramer, the host of CNBC's Mad Money and Lighting Round, made a bullish call on the stock on December 6, calling it a well-run bank operating in a growth-area. Commerce Bancshares paid a special $1.5 per share (or 4.2%) dividend on December 17. Bryn Mawr Capital (check out its top picks) is a buyer of this stock.

BOK Financial Corporation (NASDAQ:BOKF) is a Southwestern bank operating in Oklahoma, Texas, New Mexico, Arkansas, Colorado, Arizona, Kansas, and Missouri. It has increased dividends for seven consecutive years. Its dividend is yielding 2.8% on a low payout ratio of 31%. Over the past five years, the company's EPS and dividends grew at average annual rates of 5.7% and 27%, respectively. The bank's EPS CAGR is forecasted at 8.4% for the next half decade. The bank has a price-to-book of 1.3. Its ROE is strong at 11.7%. The bank has a superb free cash flow yield of nearly 12% and little long-term debt. BOK Financial has a diverse revenue base, is well capitalized, and has healthy liquidity and solid capital position. It operates in a growth area, with a particular exposure to the booming energy sector. Reputable value investor Chuck Royce has a position in the stock.

Bank of Montreal (NYSE:BMO) is a $40-billion bank with operations in Canada and the United States. The bank is known as Canada's longest-running dividend-paying company. Currently, the bank's dividend is yielding 4.8% on a payout ratio of 47%. Over the past five years, the bank's EPS and dividends grew, on average, by 8.7% and 2.1% per year, respectively. BMO's EPS CAGR is forecasted at 7.1% for the next five years. The bank's price-to-book ratio is 1.5, below its peer group's 2.0. Its price-to-cash flow is significantly lower than the average of its peer group. The stock has a sky-high free cash flow yield of 20.7% and ROE of 16%. For the reference, Canadian banks have an average ROE of 17.3%. The bank's fiscal fourth-quarter profit jumped 41% on wholesale banking, beating expectations. The bank is increasing shareholder value through planned repurchases of up to 15 million shares. World Economic Forum has named this bank one of the soundest in the world. Arrowstreet Capital is a fan of BMO.

The Bank Of Nova Scotia (NYSE:BNS) is another Canadian bank. It has raised dividends in 42 of the last 45 years. Its dividend currently yields 4.0% on a payout ratio of 44%. Over the past five years, BNS's EPS and dividends grew, on average, by 5.5% and 6.4% per year, respectively. The bank's EPS CAGR is forecasted at 9.5% for the next five years. BNS's price-to-book is 1.9, slightly below its peer group's 2.0. Its ROE of 19.6% is above the industry average. BNS also has a free cash flow yield of 7.9%. Despite Standard & Poors' recent downgrade of this bank's credit rating amid concerns about Canadian consumer debt and housing, BNS remains sound as it benefits from a diversified customer base with broad presence in international markets. Fund manager Daniel Bubis (Tetrem Capital) is bullish about this stock.

Source: Buy These 'Safe' Dividend Banking Stocks With Upside In 2013