3 Dividend Growth Plays In Financials For 2014

Includes: BLK, USB, WFC, XLF
by: Dave Dierking

Financials as a whole have performed very well in 2013 - the Financial Select Sector SPDR (NYSEARCA:XLF) is up over 32% year-to-date vs. the S&P 500's (NYSEARCA:SPY) return of 29% - and it looks like there's still room to run as valuations appear reasonable and companies should be able to benefit from higher rates and a steepening yield curve.

There's almost no yield to be found in cash and recently the dividend yield on the S&P 500 passed five-year Treasury yields and that hasn't happened in decades. So investors may need to look to equities to find some yield. Financials can be a great place to look for those yields and here are three that provide a solid dividend, are positioned to grow the dividend and provide some additional growth potential in 2014.

BlackRock (NYSE:BLK)

I wrote earlier this year about how I thought BlackRock was one of the best dividend growth plays at the time and nothing has changed my thinking on the stock.

BlackRock has had a fantastic year returning over 50% as the company has been able to increase its assets under management. The company could further benefit as the trillions of dollars currently sitting in cash and other conservative investments begin rotating back into equities and the iShares family of ETFs should continue to bolster the retail side of the balance sheet. The five-year growth forecast of 14% annually would be higher than that of both the financial sector and the S&P 500.

Equity income investors will appreciate the fact that BlackRock is currently sitting on about $26 billion in cash and that money needs to go somewhere. The stock currently yields over 2% and that large cash position should lead to a dividend hike at some point in 2014. The dividend payout has more than doubled over the past five years and that trend should continue into the new year.

US Bancorp (NYSE:USB)

US Bancorp remains one of the biggest regional banks out there and continues to see solid performance thanks to revenue growth on both the deposit and loan side. Revenues are expected to grow by roughly 3% and earnings by 6% in 2014. The company's forward P/E of 13 means it's reasonably fairly valued but Goldman Sachs still sees potential in the stock. It recently added the bank to its conviction buy list with a price target of $44.

The dividend payout was slashed around the time of the financial crisis but the company has recommitted to raising the dividend again. The dividend was bumped up 18% in 2013 and could be positioned to increase again in the latter half of 2014. US Bancorp stock currently yields 2.3%.

And if you need an added incentive, Warren Buffett recently raised his stake in US Bancorp as well.

Wells Fargo (NYSE:WFC)

One of the best plays among the big banks might be Wells Fargo. The company appears to be hitting on all cylinders as it is on pace to deliver net income growth of almost 18% year over year and the balance sheet is well positioned to take advantage of any future rise in interest rates and steepening of the yield curve. The stock looks reasonably valued. Its forward P/E ratio of 11 and a PEG ratio of 1.3 are both below industry averages.

Wells currently sports a dividend yield of 2.6% - also above the financial sector average - and the company's payout ratio of just 28% indicates that there's still room to grow the dividend further. The company in recent years has been hiking the dividend in May so if history is any guide we could be looking at another potential dividend hike around the middle of 2014.


As mentioned, financial stocks in general could benefit if the yield curve steepens and rates begin to rise in 2014. Blackrock is not in a position to benefit from this in the same way that Wells Fargo and US Bancorp might but this could be a case of a rising tide lifting all boats. Each of these stocks with 10% price appreciation potential and a 2%-plus dividend could be a nice addition to your portfolio in the new year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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