First, here’s a quick recap of why dividend-seekers are so down-in-the-mouth these days.
For one, payout growth is slowing. According to FactSet, dividends per share grew 7.5% year-over-year in the 12 months ended in the first quarter; that will likely slide again, to 4.9%, in the next 12.
Meantime, the gap between the valuations of the S&P 500’s “safest” sectors and the profits supporting them is frighteningly wide: consumer-staples stocks, for example, trade at 22-times annual earnings. That’s 25% higher than their 10-year average!
And so far, September is living up to its reputation as the worst month for stocks, with the S&P 500 whipsawing on speculation the Fed will hike rates at its meeting this week.
Which brings me back to the screaming bargains I mentioned earlier. All three are in one of the most unloved corners of the market right now: banking.
Most banks have outperformed this month, because rising rates drive up their loan income. Even so, they’ve mostly marched in place in 2016, as measured by the performance of the iShares US Financials ETF (IYF).
That means it’s not too late to get in; here are three names that should be high on your list:
JPMorgan Chase & Co. (JPM) surprised investors with two figures when it reported second-quarter earnings: one good and one bad (which was actually good news in disguise).
The first number: 16%, which was the jump in Morgan’s loan volumes year-over-year. That’s more than enough to ward off low rates and bodes well for the bank’s ability to keep loaning out cash at a fast clip when rates do rise.
The other? 50%, which is how much more money Morgan set aside to cover bad loans when compared to last year, largely because oil and gas companies are having a tough time paying the bills. But loan-loss provisions actually fell 23% from the previous quarter, suggesting the worst is behind Morgan on the energy file.
Despite these numbers (and far better than expected Q2 earnings) Morgan still trades around book value, or what it would be worth if it were broken up and sold. That’s ridiculous for a bank that’s nearly doubled its payout in five years and has grown its profits despite the Fed’s zero-interest-rate policy.
Add rising rates and you get a virtuous cycle: higher profits that fuel bigger dividend hikes and more buybacks. Repurchases, in turn, juice dividend hikes further because they leave Morgan with fewer shares on which to pay out.
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