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A Bank ETF For Dividend Hunters

ETF Professor

Bank stocks are fighting to regain the dividend destination status the group had prior to the financial crisis and over the past several years, the industry has done an admirable job of that, again becoming a reliable source of dividend growth.

Of course, there are dozens of exchange traded funds with which to play the trend of rising buybacks and dividends in the bank world, but the Invesco KBW Bank ETF (NASDAQ: KBWB) is one of the more compelling options for accessing those avenues of shareholder rewards.

The $589.6 million KBWB tracks the KBW Nasdaq Bank Index, one of the most widely followed gauges of domestic bank stocks.

Why It's Important

KBWB's 24 components have an average market capitalization of $103.38 billion, so the fund is home to familiar banking names, such as Bank of America Corp. (NYSE: BAC), JPMorgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC), KeyCorp. (NYSE: KEY) and Huntington Bancshares Inc. (NASDAQ: HBAN).

Wells Fargo is one of the largest money center banks. KeyCorp and Huntington offer impressive dividend growth potential, although they're among the higher yielders in a low yield space. KBWB's dividend yield of 2.33%.

“Today, Huntington, KeyCorp, and Wells Fargo have the highest dividend yields under our  banking coverage, with Huntington north of 4%, and KeyCorp and Wells Fargo closer to 3.9%,” Morningstar said in a recent note. “For reference, many of the banks under our coverage have yields in the mid-2% to low 3% range, so a high 3% to 4% yield is meaningfully higher.”

What's Next

In terms of what's next, investors can bank on increased buybacks and dividends going forward due to banks' stronger balance sheets, but the near-term catalyst could be an earnest rotation to value stocks. That would benefit KBWB because over 93% of the fund's holdings are classified as value names and the ETF's price-to-earnings ratio is just under 11 times.

“For Wells and KeyCorp, the higher dividend yield is at least partially due to, in our view, the undervaluation in the stocks,” according to Morningstar. “Wells and KeyCorp have been two names we have viewed as undervalued for essentially all of 2019, but both stocks are closing this gap.

"With a fair value estimate for KeyCorp of $21, and a fair value estimate for Wells Fargo of $57, the dividend yields may fall just under half a percentage point for each, if they can close what we view to be a valuation gap. But shareholders, in this case, would be rewarded with share price appreciation, and dividend yields which would still be in the mid-3% range.”

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