There are plenty of bank stocks to choose from. But not all of these investment opportunities are right for income investors.
Consider the paltry yields offered by Goldman Sachs (NYSE: GS), Bank of America (NYSE: BAC) and Citigroup (NYSE: C). These big banks pay dividends of just 1.26%, 1.16% and 0.07%, respectively.
For those kinds of yields you might as well just own bonds or get a CD from your local bank. If you’re an income investor, that’s probably not good enough.
However, there are plenty of bank stocks that do offer generous yields and stable dividends. Most of them are regional banks.
Investors are likely to flee bonds as or before interest rates begin rising. When this happens, they will seek yield from investments that are likely to perform well in a rising-rate environment. I like regional banks because, due to the nature of their shorter-term loans and consumer deposits, they tend to be much better positioned for such an environment.
Here are three regional bank stocks every income investor should love:
Bank Stock #1: Toronto-Dominion Bank (NYSE: TD)
Shares of Toronto-Dominion Bank offer the lowest yield of the group, though it is still good enough for a 3.4% dividend rate.
The stock has a consistent payout ratio, declining leverage and is aggressively growing its dividend. TD Bank avoided a dividend cut during the financial crisis, a testament to the bank’s financial strength. Not only did it survive the crisis, the bank emerged strong enough to take on other struggling banks. By expanding into Florida, Toronto-Dominion dropped the word “North” from its title and continues to grow as a regional bank operating in the U.S. and Canada.
The $0.47 dividend has been raised eight times since 2011, and is up 54%. What’s more, the company looks ready to increase its dividend in the coming months and trades at a mere 10.7 times next year’s earnings estimates.
Bank Stock #2: United Bankshares (Nasdaq: UBSI)
United Bankshares’ dividend is much less attractive than when I first wrote about it, but it still pays a 3.5% yield that blows away many bond yields.
I’m certainly not the only one that likes this stock. It’s actually up more than 16% in the past month, accounting for all of its 15% gain year-to-date. I’d like to see it pull back a bit after rising so fast but the balance sheet, its dividend and its earnings remain solid.
Bank Stock #3: People’s United Bank (Nasdaq: PBCT)
People’s United Bank offers the highest yield of the three stocks on this list at 4.4%.
The stock trades at a PE of 17.5, suggesting that it’s cheaper than the S&P 500, which has an average PE of 19.8. At this price, the stock trades slightly below the bank’s book value – another sign that the stock is reasonably valued. Unlike United Bankshares, People’s United has yet to have a major run out of the October market turmoil. The stock is only up 5% over the last month, well below the 9% gain in the S&P 500.
Bank Stocks: The Bottom Line
Ready to ditch bonds? You’re certainly not alone. For income investors, regional bank stocks are a decent alternative. You can start with the three I just mentioned.
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