Financial Stocks: Some Bigger Dividends Are on the Way

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some financial stocks to your portfolio but don't have the time or expertise to hand-pick a few, the Fidelity MSCI Financials Index ETF (NYSEMKT: FNCL) could save you a lot of trouble. Instead of trying to figure out which stocks will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. This ETF, focused on financial stocks, sports a very low expense ratio -- an annual fee -- of 0.12%. The fund is new and small, though, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This financial-stocks ETF, launched in late 2013, is too young to have a sufficient track record to assess. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why financial stocks?
If you expect the financial sector to do well over time as it continues to recover from the meltdown of several years ago, you might want to consider financial stocks for your portfolio. Remember, for example, how successfully banks can levy fees and generate income, no matter what regulations are thrown at them.

More than a handful of financial stocks had strong performances over the past year. Prudential Financial  (NYSE: PRU  ) , for example, surged 49%, though it took a bit of a hit recently, as some worry about increased governmental oversight, with Prudential being named a "Systemically Important Financial Institution." Prudential itself is worried about that, and it joined with some peers to lobby Washington for special considerations for non-bank financial institutions such as insurers. Prudential stock yields 2.5%.

Bank of America Corporation (NYSE: BAC  ) popped 43%. It recently got a go-ahead from the Federal Reserve to hike its dividend fivefold -- it will then yield around 1% -- and to engage in share buybacks as well. The company saw its income soar in 2013. Still, it's not the most loved bank, and it faces higher borrowing costs than some of its peers, making it riskier. It also faces legal wranglings. The Securities and Exchange Commission, for example, is suing Bank of America, alleging that it sold faulty residential mortgage-backed securities.

BB&T Corporation (NYSE: BBT  ) jumped 36%. It's a sizable Southeastern regional bank, and its fans admire its relative simplicity and conservative nature, along with its healthy balance sheet. Oh, and let's not forget its 111 years of dividend payments. (The stock yields 2.3%.) BB&T never lost money during the recent financial crisis, and it has gained the Fed's approval for a "conservative" dividend hike following stress tests. Its CEO got a pay cut last year, when the bank posted some disappointing numbers.

Other financial stocks didn't do quite as well over the last year, but they could see their fortunes change in the coming years. Citigroup  (NYSE: C  ) , for example, gained just 8.5% and yields 0.1%. While most banks subjected to recent Federal Reserve scrutiny passed its stress tests, Citigroup was among the minority that had its capital spending plan rejected. One reason was dissatisfaction at the Fed with how Citigroup projects its losses. Meanwhile, my colleague John Maxfield has warned about nearly $19 billion in "potentially toxic home equity lines of credit" that are soon coming due.

The big picture
If you're interested in adding some financial stocks to your portfolio, consider doing so via an ETF. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

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Selena Maranjian

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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