People invest in small and mid-cap stocks primarily because they offer more share and dividend growth potential than their bigger counterparts do. However, in terms of stability, bigger banks usually have a clear-cut edge over smaller ones, in part because they have a better chance of getting bailed out during difficult times. American banking giants such as JPMorgan Chase (NYSE: JPM ) and Wells Fargo (NYSE: WFC ) were bailed out during the financial crisis, and they're now back on track and reporting impressive earnings. Meanwhile, the number of small and regional U.S. banks appearing on the Federal Deposit Insurance Corp.'s list of "problem banks" far exceeded the number of large banks.
What to look for
If you're on the hunt for some banking dividends, pay attention to the trailing yield, forward yield, and payout ratio. Big is good, of course, and I'd consider a dividend yield north of 2% to be healthy, provided the company has ample cash to reinvest and grow. But it's equally important to ensure that the payout is sustainable. Industry benchmarks suggest that a sustainable rate typically ranges between 2% and 5%. The payout ratio is an especially important metric because it compares the dividends paid with the net income the company generates.
Let's look at five big banks that offer both income and stability, as well as a chance to help guard your portfolio against unforeseen instability in the domestic markets.
5 chances to score
- Banco Santander (NYSE: STD ) : Although Spain looks vulnerable at the moment, Santander looks strongly capitalized, with a yield that's among the highest in the industry. With quarterly net income growing sequentially, Santander looks good on the earnings front as well. It has an impressive trailing annual dividend yield of 5.50% and a current payout ratio of 63%, which is quite reasonable. The fact that Santander has been aggressively pursuing its expansion strategy shows that it isn't compromising on its growth plans and can comfortably continue making payouts at the same time.
- HSBC (NYSE: HBC ) : The U.K's biggest bank has a trailing annual dividend yield of 2.90%, and its payout ratio stands at 47%. Declining loan losses enabled this banking behemoth to post a 53% jump in its latest quarterly earnings, further enabling HSBC to increase its quarterly dividend by 12.5%. This global bank looks like an attractive investment.
- Royal Bank of Canada (NYSE: RY ) : Canadian banks have apparently dodged the financial crisis better than most of their U.S. counterparts have. The Toronto-based bank's dividend yield stands at 3.50%, and its payout ratio is 54%. It reported a 13% earnings increase in its latest quarter and subsequently raised its dividend. Fool colleague Ilan Moscovitz has shown that RBC is a dividend dynamo with strong fundamentals.
- Bank of Nova Scotia (NYSE: BNS ) : This Canadian money-spinning stock offers a healthy dividend yield of 3.40% and has a relatively moderate payout ratio of 44%. It has a market cap of $65 billion and has manufactured top-line revenue pretty consistently over the years.
- Toronto-Dominion Bank (NYSE: TD ) : Another Canadian giant that looks pretty darn attractive as far as income is concerned. It offers a lucrative dividend yield of 3.10%, and its payout ratio stands at 44%. But more importantly, it's doing great on the earnings and growth front. The bank recently acquired Chrysler Financial to expand its auto-lending business in North America.
The Foolish bottom line
These banking Goliaths are making money and offering their investors a similar opportunity. They look good from an income standpoint, and I don't see any reason they'd discontinue or even cut their dividends in the foreseeable future -- provided management doesn't goof up, of course.