Yield Seekers Can Have it Both Ways With Banks

U.S. bank stocks offer safe dividend yields and attractive valuations

By Aaron Back

Certain high-quality banks offer especially good dividends, including J.P. Morgan with a 2.9% yield. Photo: Elizabeth Shafiroff for The Wall Street Journal

Investors desperate for yield have bid up consumer staples and utilities, but they are still shunning one group of stocks with decent dividends—banks. That should change.

The six biggest banks in the U.S. sport an average dividend yield of 2.3%. True, that isn’t much above the S&P 500 yield of 2.1%, but it is the same available from the popular Consumer Staples Select Sector SPDR Fund, XLP 0.20 % which has been bid up to a nosebleed multiple of 22 times 2016 earnings. By comparison, major banks fetch an average of 12 times earnings.

Certain high-quality banks offer especially good dividends, including J.P. Morgan Chase JPM -0.42 % with a 2.9% yield, and Wells Fargo WFC -0.47 % with 3.1%. Some major regionals also look attractive, such as BB&T, BBT -0.27 % which yields 3.2%.

Compare that with a classic staple stock like Clorox, CLX -0.02 % which, after years of gains, now yields just 2.4% and trades at a tech stocklike 24 times earnings.

Investors like staple stocks because they perceive their yields to be safe. In a world of record-low interest rates, reliable sources of income are hard to come by. In fact, a host of factors, including an emerging-markets slowdown and rising competition from independent upstarts, could threaten these payouts.

By contrast, the dividends paid by major banks are probably safer. They don’t resemble the same institutions that nearly folded in the financial crisis. Banks now go through annual stress tests by the Federal Reserve, establishing that they could maintain their dividends and share buybacks even through incredibly tough conditions. The latest Fed scenario simulated the failure of a major counterparty, a global recession on par with 2009, and negative yields on U.S. Treasurys—all at the same time.

Still, banking shares remain decidedly unloved by investors. The KBW Nasdaq NDAQ 0.13 % bank index is down 4% so far this year compared with a 5% rise in the S&P 500 and an 9% rise in the Consumer Staples SPDR fund.

This may be because investors rightly view the banks as losers from the low-interest rate environment. If rates go negative in the U.S., as they have in Japan and Europe, banks will indeed suffer. But, at least according to the Fed, they should be able to survive and keep paying dividends even in this case.

And consider the opposite scenario. If rates eventually go up, expensive staple stocks and utilities, held for their dividends, are likely to get hit hard. But banks would probably rally.
As they scour the world for yield, investors shouldn’t ignore U.S. banks. They offer reliable income, and eventual capital gains when interest rates finally start rising.

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