Who doesn't love a high-yielding dividend stock? These companies throw off enough cash that management can fund operations and growth with enough cash left over to send shareholders a handsome little check every quarter. Seriously, what's not to love?
Banks, when managed properly, are a perfect business model for steady, reliable dividends. Make a loan today and that loan will bring in cash flow every month for a year or two... or maybe even 20. As long as the bank maintains a strong credit culture, avoids taking excess risks, and runs an efficient operation, then investors can comfortably count on that dividend check quarter after quarter.
In that spirit, let's break down a few banks with very attractive dividend yields.
The banks and their dividends
To kick off this breakdown, let's start with this table of the five banks and their current yields, per S&P Capital IQ.
| Company Name | Dividend Yield |
|---|---|
| New York Community Bancorp (NYCB) | 6.3% |
| People's United Financial (PBCT) | 4.5% |
| Valley National Bancorp (VLY 5.47%) | 4.5% |
| Union Bankshares (UNB 1.96%) | 4.2% |
| Trustmark Corporation (TRMK 3.89%) | 4.0% |
While researching this article, I reviewed the financials of 75 of the nation's largest banks. Among that sample, the average dividend yield was 2.1%. Seven of those institutions do not currently pay a dividend. According to data from the Wall Street Journal, the average dividend yield of the S&P 500 (^GSPC -0.88%) currently stands at 1.95%.
At double and even triple those averages, these bank stocks represent a fantastic opportunity for boosting your income portfolio. But a dividend is only beneficial if it sits on the back of a fundamentally strong company. Let's take a moment now to analyze some fundamental metrics of these banks to make sure that we're comfortable with each bank's long term stability.
Efficiency, leverage, and return on equity
For banks, efficiency is one of the elements most critical to long term success. A bank with out of control costs will often look to riskier assets to boost returns, a recipe for failure over the long term. A lower efficiency ratio is considered more efficient.
Second, we need to address the returns a bank provides to its shareholders, expressed by return on equity. At the end of the day, it is profits and cash flow that pay for our dividend checks each quarter, so a bank must have sufficient returns to continue paying its dividend.
Lastly, we'll take a look at the leverage each bank uses on its balance sheet to boost return on equity. Banking is a leveraged business; the industry today averages an assets to shareholder equity of about 10 times. If we see that one of our banks uses excess leverage -- say 14 times or more -- to boost its return on equity number, then it is fair to conclude that its dividend is a greater risk than that of another bank with lower leverage.
I've included the dividend yields in this chart again for easy comparison.
| Company Name | Efficiency Ratio | Return on Equity | Assets to Equity | Dividend Yield |
|---|---|---|---|---|
| New York Community Bancorp | 43.4% | 8.3% | 8.44 | 6.3% |
| People's United Financial | 61.8% | 6.3% | 7.32 | 4.5% |
| Valley National Bancorp | 72.6% | 7.5% | 10.38 | 4.5% |
| Union Bankshares, | 66.3% | 15.0% | 11.01 | 4.2% |
| Trustmark Corporation | 68.1% | 9.5% | 8.66 | 4.0% |
Foolish takeaway
Reviewing these key metrics points to a conclusion that may have already been obvious from these companies' dividend yields: all of these banks look quite solid.
People's United Bancorp, Valley National Bancorp, and Trustmark Corporation are all great options with acceptable efficiency ratios, conservative leverage, and decent returns.
Union Bankshares, on the other hand, stands out with its 15% return on equity and slightly above average leverage. That said, an assets to equity ratio of 11 times is not outrageous, and should not be cause for alarm.
Source: Company website
At the top of the mountain sits New York Community Bancorp.
The bank's dividend yield is triple the industry average, its efficiency ratio is downright amazing, and its use of leverage is quite conservative. In my view, this bank is by far the top dividend stock in the banking industry.
