For Immediate Release
Chicago, IL – February 27 th, 2014 - Securities in this article include: Citigroup ( C- Free Report), Bank of America ( BAC- Free Report), Morgan Stanley ( MS- Free Report), Bank of New York Mellon ( BK- Free Report), JPMorgan ( JPM- Free Report), PNC Financial Services Group ( PNC- Free Report), State Street ( STT- Free Report), Wells Fargo ( WFC- Free Report), U.S. Bancorp ( USB- Free Report), Financial Select Sector SPDR Fund ( XLF- Free Report), PowerShares KBW Bank Fund ( KBWB- Free Report) and iShares U.S. Financial Services ETF ( IYG- Free Report).
Bank on Dividends with These Financial ETFs written by Zacks Equity Research:
Big U.S. banks are undergoing the sixth round of the Dodd-Frank Act supervisory stress test by the Fed, results of which are expected next week. Under this test, the 30 top-tier banks have to illustrate their capital strength to endure a major economic downturn.
After clearing the stress test, the banks would be able to offer healthy dividend increases to their shareholders. As such, dividend hikes from banking giants are likely to roll in the coming weeks. In particular, three big players - Citigroup ( C- Free Report), Bank of America ( BAC- Free Report) and Morgan Stanley ( MS- Free Report) are looking for huge increases in their dividends (read: 3 Financial ETFs to Watch on Volcker Rule Implementation).
According to Markit, Bank of America and Citigroup plan to raise their dividends by 400% each to 5 cents per share. This would translate into a 12% payout ratio and 1.2% yield for the former, and a 3% payout ratio and 0.4% yield for the latter. Morgan Stanley would double its dividend to 10 cents per share, resulting in a 14% payout ratio and 1.4% yield.
Other major banks such as Bank of New York Mellon ( BK- Free Report), JPMorgan ( JPM- Free Report), PNC Financial Services Group ( PNC- Free Report), State Street ( STT- Free Report), Wells Fargo ( WFC- Free Report) and U.S. Bancorp ( USB- Free Report) would see modest dividend growth in the range of 7%–20% because their payout ratios are already close to the Fed’s benchmark of 30%.
Overall, Markit projects banking dividend growth of 25% for the second quarter compared to the first, should the banks successfully pass the stress test. If the predictions from Markit come true, then it could provide a strong boost to the dividend yields for a number of financial ETFs tracking these banking stocks (see: all the Financial ETFs here).
Below, we have highlighted three ETFs that will are likely to be the major beneficiaries from the dividend increase, any of which could make for a solid play to tap the dividend-paying stocks of the financial sector:
Financial Select Sector SPDR Fund ( XLF- Free Report)
The most popular financial ETF on the market, XLF, follows the S&P Financial Select Sector Index. This fund manages about $16.7 billion in assets and trades in heavy volume of roughly 40 million shares a day. The ETF charges 16 bps in fees per year from investors. In total, the fund holds about 83 securities in its basket.
Out of these, seven banks that are poised for dividend hikes belong to the top 10 holdings line-up and collectively make more than one-third of the portfolio. In terms of industry exposure, the product is tilted toward diversified financial services at nearly 32% while insurance, commercial banks, capital markets and REITs account for double-digit allocation (read: Unpopular Sector ETFs to Start 2014).
XLF currently yields 1.49% in annual dividends and has lost 1% so far this year. The ETF has a Zacks ETF Rank of 1 or ‘Strong Buy’ with a ‘Low’ risk outlook.
PowerShares KBW Bank Fund ( KBWB- Free Report)
This fund tracks the KBW Bank Index and has AUM of $165.6 million. Volume is good as it exchanges more than 131,000 shares a day while expense ratio comes in at 0.35%. The product holds 24 stocks in its basket with largest allocations to 18 big banks that are expected to raise dividends. These collectively make up for 89% of the total assets.
From a sector look, banks account for 63% share, followed by financial services (25%), consumer finance (8%) and investment companies (4%). KBWB currently has a dividend yield of 1.46%. The ETF is down 0.5% in the year-to-date time frame but has a Zacks ETF Rank of 2 or ‘Buy’ with a ‘Low’ risk outlook.
iShares U.S. Financial Services ETF ( IYG- Free Report)
This product follows the Dow Jones U.S. Financial Services Index, holding 109 stocks in its basket. Like its two counterparts, the ETF holds the in-focus eight banking giants in its top 10 holdings, accounting for 50% of total assets. Banks dominate the fund’s portfolio from a sector look while financial services make up for the remainder.
The fund has amassed $620.9 million in its asset base and sees moderate average daily volume of over 78,000 shares. It charges a slightly higher fee of 45 bps from investors. The product lost about 1.3% year-to-date and pays 1.07% in dividend yield. IYG currently has a Zacks ETF Rank of 3 or ‘Hold’ with a ‘Low’ risk outlook (read: Mixed Banking Earnings Put These ETFs in Focus).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
For the full article, please visit Zacks.com at:
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros http://at.zacks.com/?id=113
Follow Eric on Twitter: https://twitter.com/ericdutram
Join Zacks on Facebook: https://www.facebook.com/ZacksInvestmentResearch
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.
Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security.
ETF Product Manager
Zacks Investment Research
Read the analyst report on C
Read the analyst report on BAC
Read the analyst report on MS
Read the analyst report on BK
Read the analyst report on JPM
Read the analyst report on PNC
Read the analyst report on STT
Read the analyst report on WFC
Read the analyst report on USB
Read the analyst report on XLF
Read the analyst report on KBWB
Read the analyst report on IYG
Zacks Investment Research