Four Dividend-paying Investments to Ride Rebound of Big Bank Stocks
By: Paul Dykewicz,
Four dividend-paying investments to ride amid an expected rebound in big bank stocks seem poised to power through risks such as stubbornly high inflation and a potential recession.
The four dividend-paying investments to ride for a likely recovery in big bank stocks should be better positioned than smaller regional banks to withstand current economic headwinds. Relatively high cash levels and expectations for reduced short-term rates, following the Fed’s recent rate hikes, suggests that pessimism is close to levels seen at market lows of the past 20 years, according to BofA Global Research.
That sentiment among investors suggests the 3,800 floor in the S&P will hold for now, but may be followed by a rally to 4,100-4,200, according to BofA. Investors currently prefer large caps over small caps, along with quality trumping junk bonds, as a recent shift of deposits from banks occurred at the fastest pace since Russia’s invasion of Ukraine, BofA added.
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Four Dividend-paying Investments to Ride When Big Banks Rebound
The broad macroeconomic picture shows signs of weakness, with employment indicators deteriorating on a year-over-year and sequential basis in recent weeks, BofA reported. Despite rate increases, the unemployment rate in March of 3.5% was down 10 basis points, or 0.10%, from February.
As wage growth eases, the Fed will continue to consider relatively strong unemployment levels and the price indices in setting future rate hikes. While there have been signs of prices cooling, BofA Global Research is less optimistic for a soft landing and expects a mild recession to begin in second-half 2023.
Adjusted retail and food sales, along with credit card balances, are up on a year-over-year basis, as consumers keep spending amid high inflation. Plus, the mortgage backdrop has become progressively more difficult, and higher interest rates are leading to lower originations overall amid worsening affordability, BofA wrote.
Federal Reserve’s Supervision and Regulation Must Be Enhanced After Silicon Valley Bank Failure
The Federal Reserve’s supervision and regulation must be strengthened in the wake of the Silicon Valley Bank (SVB) failure on March 10, said Michael Barr, the Federal Reserve System’s vice chairman for supervision. After the Federal Reserve’s review of its supervision and regulation of Silicon Valley Bank, Barr said upon release of the report on April 28 that the failure stemmed from “a textbook case” of mismanagement by the bank, whose senior leadership mismanaged basic interest rate and liquidity risk.
“Its board of directors failed to oversee senior leadership and hold them accountable,” Barr said. “And Federal Reserve supervisors failed to take forceful enough action, as detailed in the report. Our banking system is sound and resilient, with strong capital and liquidity. And in some respects, SVB was an outlier because of the extent of its highly concentrated business.”
This report is meant to serve as a self-assessment that takes an “unflinching look” at the conditions that led to the bank’s failure, including the role of Federal Reserve supervision and regulation, Barr said. Individuals not involved in the Silicon Valley Bank’s supervision conducted the review, which Barr said he oversaw.
Four Dividend-paying Investments to Ride Recovery of Giant Banks
In the Fed’s recent monthly report, the U.S. central bank announced that “loans to commercial banks” jumped to $345.5 billion in March. The Fed’s Discount Window was “wide open,” with the Fed making more short-term loans to banks than it did in the financial crisis of 2008, said Mark Skouen, PhD, who co-heads the Fast Money Alert trading service with seasoned investor Jim Woods.
Mark Skousen co-heads Fast Money Alert.
Bank deposits, which Skousen, a free-market economist, equated to the money supply, fell 2.5% as depositors withdrew billions from their bank accounts. If that trend continues, the United States will be facing a “major credit crunch,” he added.
Skousen wrote in his monthly investment newsletter, Forecasts & Strategies, that he laughed upon reading the headline of the Federal Reserve monthly report: “The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible and stable financial and monetary system.”
Fed policy is anything but stable, Skousen said.
“While the Biden administration continues to spend money like water, the Fed has imposed a tight money policy, which is likely to create an inflationary recession this year,” Skousen wrote to his Forecasts & Strategies subscribers.
Four Dividend-paying Investments to Ride Gain Skousen’s Attention
Even though investing in banks at this time is not free of risks, Skousen notched a profit of nearly 8% in just 43 days during 2021 by recommending shares of New York-based Signature Bank (OTCMKTS: SBNY) in Fast Money Alert. Skousen also has recommended banking stocks and call options in his Home Run Trader advisory service.
In Home Run Trader, Skousen recommended US Bancorp (NYSE: USB) for a 3.22% gain during 2007. The next year, Skousen recommended buying Bank of Montreal (NYSE; BMO), producing a 10.43% profit, before offering another bullish call in 2012 when he recommended Westpac Banking Corp. (NYSE WBK) before it jumped 13.92%.
Jim Woods, who heads the Bullseye Stock Trader advisory service, while also teaming up with Skousen in Fast Money Alert, recommends both stocks and options, and his interests include banking stocks.
Jim Woods heads Bullseye Stock Trader.
Woods wrote in his May 2023 Successful Investing newsletter that banks and the financial sector essentially had free money through minimal interest rates for more than a decade. The Fed then jacked up rates within about 10 months to levels last seen in the 1990s, with the resulting financial stress contributing to the failure of Silicon Valley Bank and others, he added.
Four Dividend-paying Investments to Ride Big Banks’ Bounce, Despite Industry Challenges
Bank of America (NYSE: BAC), of Charlotte, North Carolina, is a stock favored by Michelle Connell, who heads the Dallas-based Portia Capital Management. One of the big incentives to owning shares in the bank is its nearly 3% dividend yield that pays shareholders to stay patient for the financial sector to rebound.
Michelle Connell heads Portia Capital Management.
“Since the mortgage and financial crisis of 2008 and 2009, Bank of America has rebuilt its dividend payment record,” Connell continued. “In the last eight years, Bank of America has continued to increase its dividend.”
Bank of America recently posted strong metrics for its latest quarter, Connell said. As the second-biggest bank in America, behind only JPMorgan, Bank of America beat its earnings expectations, reported record inflows of $37 billion in cash deposits from new and existing clients and attracted 14,500 new clients through its Merrill Lynch brokerage and private bank unit, she added.
Despite speculation among forecasters that further bank failures may occur, Bank of America’s net interest income met expectations and its leaders are offering guidance of meeting analysts’ performance estimates, Connell counseled.
Four Dividend-paying Investments to Ride Big Banks that Aided First Republic Bank
Another sign of strength is that Bank of America was one of 11 financial institutions that contributed to the $30 billion used shore up First Republic Bank, Connell said. BAC’s Chief Executive Officer Brian Moynihan has done an “amazing job” since 2010 when he took the helm, Connell added.
Moynihan knows his client base and understands how to grow and deliver profits during all phases of an economic cycle, Connell said. Despite Bank of America’s share price sliding 15.50% in the past year and 10.93% so far this year, Berkshire Hathaway’s Chairman and Chief Financial Officer Warren Buffett remains “enamored” with the stock, Connell commented.
Bank of America is Buffett’s largest bank holding and his second-biggest overall stock position, Connell continued. As far as Bank of America’s potential upside, Connell estimated its share price could rise about 20% from current levels.
Another reason why Connell said she likes Bank of America is that she views its stock as undervalued, with a price-to-earnings ratio (P/E) ratio of 8.97. The modest P/E gives the bank a “very compelling” price point, Connell said.
“The bank has a solid balance sheet and fundamentals that should help it continue to perform for its clients and stockholders,” Connell said.
Chart courtesy of www.stockcharts.com
JPMorgan Chase Is Among Four Dividend-paying Investments to Ride
Another of the three big banks to buy is New York-based JPMorgan Chase (NYSE: JPM), with a $417.2 billion market capitalization. JPMorgan Chase is recommended as a buy in a recent BofA Global Research report, and it fits the investment bank’s description as a “mega-cap bank” that is preferred to regional banks, given its superior liquidity position, diversified revenue profile and credit defensibility.
For example, JPMorgan Chase produces a significant amount of its revenue internationally and its non-domestic focus is expected to grow, BofA wrote in its research note. JPMorgan continues to invest in China but appears to do so cautiously, BofA added.
The big bank’s management is seeking to grow its business in the Middle East, with Dubai a particular focus, given capital migration into the region. BofA put a $153 price objection on JPMorgan in late February. Positive developments could include better-than-expected credit quality and better interest rate defensibility, BofA wrote.
Chart courtesy of www.stockcharts.com
Citigroup Makes List of Four Dividend-paying Investments to Ride
New York-based Citigroup (NYSE: C), with a market capitalization of nearly $100 billion, is another big bank stock that BofA views as a buy. Citigroup built its own brokerage platform but partnered to enter the insurance business.
The bank’s management continues to hire financial advisers with the goal of adding new clients and funds under management to its business. High net worth individuals with $5-20 million in assets are a coveted niche for growth, BofA wrote.
On the commercial banking side of Citigroup’s business, deposit growth is slowing but its retail deposits are gaining at a quicker rate than the industry, BofA noted. Wealthy customers are moving money into certificates of deposit (CDs) and fixed-income securities, but the bank’s multi-product offerings are helping to limit attrition.
The bank’s management also is eyeing digital marketing to contribute 30% of its deposit growth, according to BofA. Citigroup’s multi-pronged growth strategy impressed BofA bank analysts to assign the stock a price objective of $60.
Chart courtesy of www.stockcharts.com
KBWB Latches onto Four Dividend-paying Investments to Ride
Investors interested in the big banks should consider Invesco KBW Bank (KBWB), said Bob Carlson, who heads the Retirement Watch investment newsletter and serves as a pension fund chairman. The fund tracks the KBW Nasdaq Bank Index, which is designed to mirror the performance of large national U.S. money center and regional banks, as well as thrift institutions.
Bob Carlson, head of Retirement Watch, meets with Paul Dykewicz
It has 22 stocks with 67% of the fund invested in the 10 largest positions. Top holdings recently were JP Morgan Chase, Citigroup, Wells Fargo (NYSE: WFC), Bank of America and US Bancorp (NYSE: UBC) Each of the three largest positions is more than 9% of the fund, and the fourth is slightly less than 9%.
KBWB was up 37.76% in 2021, down 21.70% in 2022, and is down 19.78% so far in 2023. The yield recently was 3.73%.
Chart courtesy of www.stockcharts.com
CDC Sees Rising Vaccinations Against New Bivalent Variant of COVID-19
The U.S. Centers for Disease Control and Prevention (CDC) reported at least one vaccination against COVID-19 and its bivalent variant has been given to 270,047,396 people, or 81.3%, of the U.S. population, as of April 26. Those who have completed the primary COVID-19 doses totaled 230,533,196 of the U.S. population, or 69.4%, according to the CDC.
Also as of April 26, the United States had given a bivalent COVID-19 booster to 52,331,682 people who are age 18 and up, equaling 20.3% of America’s population. Medical studies have shown vaccinations help keep people healthy and reduce the morbidity from contracting COVID, potentially boosting confidence of consumers to shop at stores, travel and otherwise spend money.
The four dividend-paying investments to ride should benefit from big banks positioning themselves to recover along with the financial services industry in general. Further financial institution failures certainly are possible but the big banks face heightened regulation that should keep them among the safest bets in the industry.
Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Crain Communications, Seeking Alpha, Guru Focus and other publications and websites. Paul can be followed on Twitter @PaulDykewicz, and is the editor and a columnist at StockInvestor.com and DividendInvestor.com. He also serves as editorial director of Eagle Financial Publications in Washington, D.C. In that role, he edits monthly investment newsletters, time-sensitive trading alerts, free weekly e-letters and other reports. Previously, Paul served as business editor and a columnist at Baltimore’s Daily Record newspaper and as a reporter at the Baltimore Business Journal. Plus, Paul is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The uplifting book is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many other sports figures. To buy signed and specially dedicated copies, call 202-677-4457.
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