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I have stated in the past that I wouldn't fool with financial stocks after the drubbing I took in 2008. I never knew how dangerous they could be -- thinking of stogy old banks paying a 5% yield with perfect safety. My portfolio has still not recovered in the financial sector — still down 45.42% from my purchase cost. You would think I'd remember such a hard lesson. Being the eternal optimist that I am, I believe in reversion to the mean. If these stocks don't come back someday, the United States will end up like Europe.

In 2011 I dipped my toe back into the periphery with my purchase of American Capital Agency Corp. (NASDAQ:AGNC), an mREIT. I figured there couldn't be anything more risky than a bank. Although it was not a major gainer for the year, only flat from my purchase point, it still paid the $1.40 per quarter for a 20% yield on my cost. I felt confident enough in it to purchase some for two of my grandchildren's college funds. In this article, I will venture out further into financial stocks with an insurance company, a private equity company, and a BANK! When investing in financial stocks, buyer beware! Limit your exposure to this sector. Real estate has been separated from the financial services sector in the SPY and I will compare my other financial holdings to SPY's 12.4% financial holdings. At present my portfolio holds 4.4% financial stocks. I will be looking to raise this percentage by 2% with one or a combination of positions during 2012. (Data from First Call, Market Edge, Zacks, Yahoo Finance, Fidelity, and David Fish's CCC charts).

  1. AFLAC Incorporated (NYSE:AFL) -- Insurance company, Financial Sector. AFLAC Incorporated, through its subsidiary, American Family Life Assurance Company of Columbus (AFLAC), provides supplemental health and life insurance. The company offers various voluntary supplemental insurance products, including cancer plans, general medical indemnity plans, medical/sickness riders, care plans, living benefit life plans, ordinary life insurance plans, and annuities in Japan. This Dividend Champion has 29 years of increasing dividends. The current yield is 3.05%*. The 5-year dividend growth rate is 17.5%, while last year's dividend growth was just 7.9%. The current p/e is 10.98. The projected earnings per share growth for next year is 4.55%, while for the next 5 years it is 19%. The biggest metric to this stock is the 98% debt to total assets ratio. The debt (considered other liabilities) appears to balance long term investments, but there is considerable risk in the financial markets globally today and prior to purchase, I would find out what these other liabilities are. *It should also be noted that the yield does not meet my 4% minimum for initial investment. When the stock price has fallen to $33/ share and meets my 4% yield point, I will study their “other liabilities”.
  2. BlackRock Kelso Capital Corporation (NASDAQ:BKCC) -- Private equity firm, Financial Sector. BlackRock Kelso Capital Corporation is a private equity firm specializing in investments in middle market companies. The firm invests in all industries. It prefers to invest between $10 million and $50 million and can invest more or less in companies with EBITDA or operating cash flow between $10 million and $50 million. This stock has erratic dividends, which have fallen over the past1 and 4 year periods. The yield is 12.7% and the quarterly dividend was cut from $.32 to $.26 in March 2011. The current p/e is 9.6 which is amply justified by the yield. The price chart is cyclical with a downward bias since 2007 (the stock has fallen from $15 to $8.16). I will be looking at a 14% yield point for entry ($7.43). This is a small cap company with a market cap of $597.92M. With the high payout (122%) and the history of cutting the dividend, one must be careful when investing in this stock. Limit your exposure to these firms in volatile markets.

  3. JP Morgan Chase & Co. (NYSE:JPM) -- Bank, Financial Sector. JPMorgan Chase & Co., a financial holding company, provides various financial services worldwide. Its Investment Bank segment provides various investment banking products and services, including advising on corporate strategy and structure, capital-raising in equity and debt markets, risk management, market-making in cash securities and derivative instruments, prime brokerage, and research services serving corporations, financial institutions, governments, and institutional investors. This stock pays erratic dividends. The last quarterly dividend cut was during the financial crisis, when it dropped from $.38 to $.05 in April 2009. In April 2011, it was partially restored to $.25. The current yield is 3.1%*. The current p/e is 7.1. The projected earnings per share growth for next year is 7.28% and for the next 5 years is 5.2%. The price chart is cyclical averaging $35 over the last 5 years. The price has fallen from $48.30 to $15.93 in March 2009 and has now come back to $33.25. This bank is another stock with 91.6% debt to total assets ratio. *It should be noted that the yield does not meet my 4% minimum for initial investment. I will wait for the 4% yield point ($25) before further investigation of the balance sheet (current assets/current liabilities is 33.6%).

A chart comparing these three stocks over the last five years shows the cyclical nature of all three stocks, when compared to SPY (S&P500 Index ETF).

(Click to enlarge)

We will now look at the dividend income stream for these three stocks. With equal positions of $10k each purchased 1 year ago, these stocks produced a quarterly income stream as shown in the following table:


Quarterly Dividend Rate

Number of Shares

Quarterly Income













In order to investigate the growth of the portfolio, due to dividend reinvestment, I will once again create a spreadsheet for only the last year (December 2010-December 2011).

Date of reinvest Div Rate # Shares Dividend Drip price # Shares pur Total Value
179.38 $216.89 4.62
11/14/11 $0.33 178.05 $58.76 $44.31 1.33 $7,948.32
08/15/11 $0.30 176.66 $53.00 $38.05 1.39 $6,774.94
05/16/11 $0.30 175.68 $52.70 $53.53 .98 $9,456.65
02/11/11 $0.30 174.76 $52.43 $57.22 .92 $10,052.20
1,192.66 $1,212.82 137.81
12/19/11 $0.26 1,155.03 $300.31 $7.98 37.63 $9,517.45
09/15/11 $0.26 1,120.94 $291.45 $8.55 34.09 $9,875.50
06/15/11 $0.26 1,090.46 $283.52 $9.30 30.49 $10,424.77
03/16/11 $0.32 1,054.85 $337.55 $9.48 35.61 $10,337.53
231.19 $182.31 4.74
10/04/11 $0.25 229.30 $57.32 $30.26 1.89 $6,995.94
07/01/11 $0.25 227.93 $56.98 $41.58 1.37 $9,534.29
04/04/11 $0.25 226.71 $56.68 $46.34 1.22 $10,562.25
01/04/11 $0.05 226.45 $11.32 $44.16 .26 $10,011.35

At this point, I will add a table to illustrate the growth of dividends received and the steadily growing income over time.


























In addition, I will illustrate the total value of this portfolio by quarter in the following graph:

(Click to enlarge)

It can be seen from the table that the income for the year was $1612.02. On an investment of $30k, this was 5.37% yield. It can be seen from the Total Portfolio chart that the ending portfolio value was $24461.71. This computed out to a capital loss of $5538.29 or -18.46%. The problem here was the summer swoon in financial equities with downgrading of the US debt as well as the European debt crisis.

When compared to SPY, which pulled out a 2% yearly return (flat gain + 2% dividends), these financial stocks did poorly — reflecting their weak sector. As can be seen from the 5-year price chart, all of these stocks and the index are cyclical with 70%-80% drops at the bottom of the Great Recession. All of these stocks did worse than the SPY over the 5-year period. Will financial stocks revert to their historical mean in 2012? I am looking for further pullback and have set price targets to pick up what I consider to be better than average financial stocks — patience is virtue in this endeavor.

Conclusion: With the continuation of the financial crisis in Europe in 2012 and the possibility of a recession there, financial markets will be under stress throughout the year. Small cap stocks, like BKCC that invest in mid-cap companies will find it difficult to grow and should be considered a trading stock if purchased for the yield. AFL should be purchased as a long term investment. Understanding the debt structure of this company is of major importance before purchase. JPM appears to be a large bank, which has weathered the last financial crisis. If one needs a bank to round out their portfolio, JPM would be a good candidate at the 4% yield point. The debt should be studied to see if one is comfortable with it. In addition, the propensity to cut the dividend appears to be a deterrent to purchase. I would not say all of these financial stocks are speculations, but I would hold off buying them until they meet my price points. It is critical that each investor does their own due diligence before making any investment.

Source: 3 Financial Stocks For 2012