Bank Stocks: Dividend Yield Post Subprime Meltdown

Aside from homeowners who lost their homes through foreclosure, other victims in this sub-prime mortgage crisis are of course the lenders who provided the loans. This includes the nation’s largest banks, many of which exposed themselves to investments tied to bad loans.

The financial sector was hit very hard and the steep decline of financial shares since the summer also brought down the entire market. In fact, the turmoil in the housing and credit markets put the economy at the risk of slipping into a recession (Bloomberg.com).

After reaching the record high of 14,164 on October 9th, the Dow has given up all the gains after the Fed’s surprise larger-than-expected rate cut in September, losing 8.5% from its peak. At the same time, The Dow Jones US Financials Index (^DJSFN) has dropped 14.6% and nearly 20% so far this year.

If you own any of the big banks, you probably won’t be very happy with your stock’s performance. Many stocks, like Citigroup (C), lost a quarter of their value in one month. There’s one bright side though, and it’s the current dividend yields of the banks. As the share price drops, the dividend yield increases. The following is a table of the nation’s largest publicly traded banks with their dividend yield, share price and year-to-data return (as of November 19th).

Name	Yield (%)	Price	YTD return (%)
Citigroup (C)	6.8	$32.00	-39.9
Bank of America (BAC)	5.4	$42.82	-17.0
J. P. Morgan Chase (JPM)	3.5	$41.37	-11.8
Wachovia (WB)	6.1	$38.48	-29.0
Wells Fargo (WFC)	3.9	$30.53	-11.1
U.S. Bancorp (USB)	5.1	$31.43	-10.0
Suntrust Banks (STI)	4.1	$67.62	-17.8
Capital One Financial (COF)	0.2	$51.50	-32.9
National City (NCC)	7.9	$20.37	-41.4
Regions Financial (RF)	6.1	$23.77	-34.3
BB&T (BBT)	5.3	$33.12	-21.3
PNC Financial Services (PNC)	3.5	$69.07	-3.5
State Street (STT)	1.1	$76.18	13.9
Fifth Third Bancorp (FITB)	6.0	$27.51	-30.5
Keycorp (KEY)	5.8	$25.02	-32.2
Northern Trust (NTRS)	1.3	$75.01	25.1
Comerica	5.8	$42.94	-25.1
Marshall & Ilsley (MI)	3.9	$30.05	-36.3
M&T Bank (MTB)	2.8	$88.28	-26.5
Union Bank of Calif. (UB)	4.0	$49.45	-17.2
Charles Schwab (SCHW)	0.9	$22.93	25.7
Zions Bancorporation (ZION)	3.4	$50.22	-37.6
Commerce Bancorp (CBH)	1.5	$35.17	1.1
Popular (BPOP)	6.8	$9.40	-46.1

One year ago when I purchased my first share of Bank of America through DRIP, the dividend yield was at 4.10%. Now it jumped to 5.40%. And the yield of Citigroup is even higher at 6.80%. Of course, there isn’t much to smile about when the share price dropped nearly 40% since the beginning of the year.

But for investors who reinvest the dividend distribution instead of taking it as cash and want to hold the stock for a long time, the drop in price means now the distribution can buy more shares of the stock cheaply (Citi has a 1-year forward P/E of 7.5), provided that the company can maintain its current dividend level. And those shares added without commission will make a bigger contribution in terms of return later if the stock rebounds.

At least that’s a little something to gain from this mess.

Disclosure: Long BAC

Comments

[Arohan]

Mouthwatering!!!

You forgot Washington Mutual (WM) at almost 11% yield

While the ripples of the sub-prime fiasco may take some time to subside, an opportunistic investor will do really well to pick up some of the quality names today at a bargain price. The financials will eventually recover, meanwhile it is nice to collect these dividends as an incentive to wait

Long BAC and WM

I have also written about the opportunity in financials at arohanvalue.blogspot.c...

- Arohan

[RPK]

Not all of the banks listed are the same. For example, State Street (STT) is primarily an asset manager and provides back-office functions. It can hardly be classified as the same type of bank as Citibank (C), J.P. MorganChase (JPM), Bank of America (BAC), etc.. Northern Trust (NTRS) and Charles Schwab (SCHW) are also significantly different. Even the banks with significant mortgage operations are different, some have a large retail presence and others do not. Some funded mortgages through debt whereas others issued mortgages primarily based upon retail deposits.

[RPK]

Not all of the banks listed are the same. For example, State Street (STT) is primarily an asset manager and provides back-office functions. It can hardly be classified as the same type of bank as Citibank (C), J.P. MorganChase (JPM), Bank of America (BAC), etc.. Northern Trust (NTRS) and Charles Schwab (SCHW) are also significantly different. Even the banks with significant mortgage operations are different, some have a large retail presence and others do not. Some funded mortgages through debt whereas others issued mortgages primarily based upon retail deposits.

[kurt walter]

The WM dividend will never hold. Expect a big cut sooner than later.

[Arohan]

The dividend cut (WM) was widely expected and is in now. It is still a respectable 3.5%. Once the market comes out of the doldrums and assuming WM survives, the dividend will be ratcheted up again. So if you are investing now, you may actually get a very good yield on the money invested.

However, the risk in WM is not something everyone is going to be comfortable with

arohanvalue.blogspot.c...