The volatility in the market has everyone on the hunt for good dividend stocks that can provide passive income, and perhaps a little more stability and less of the unrest seen so far this year.
There is no shortage of options out there. While many dividend stocks can be companies with not a lot of growth, the best scenario is to find a stock that has a strong dividend and the potential for some price appreciation as well. The banking sector is usually a good place to look. Here are three dividend stocks that seem to be flying under the radar.
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1. ING Groep
Like many European banks, the Dutch bank ING Groep (ING 1.30%) has seen its stock price decline over the last five years, losing shareholders close to 15% on their investment. But with inflation on the rise, economists see the European Central Bank potentially leaving behind negative interest rates and getting its benchmark lending rate back to zero this year, which would help banks in the region.
ING generated a 9.2% return on equity in 2021 and has ambitions to expand that number to between 10% and 12%.
ING also has a lot of excess capital: more than 10 billion euros ($11.21 billion) above its regulatory requirements. It can use this capital to support loan growth, make an acquisition, or return capital to shareholders through dividends and stock buybacks. Buybacks would be particularly beneficial while the bank trades below tangible book value, which is what a bank would be worth if it were liquidated.
ING's dividend is currently yielding roughly 6%. The bank had to pause its dividend following the Great Recession but then reinstated it at the beginning of 2015. Since then, the yield has been pretty steady, aside from when all European banks had to pause dividends during the pandemic. In general, I feel pretty good about ING sustaining this yield. The bank's policy is to pay out 50% of profits in either dividends or share repurchases. As I mentioned above, ING has a ton of excess capital above its regulatory requirements and is also planning to increase its returns. In fact, analysts on the bank's recent earnings call seemed to think a special dividend is in play due to the high capital levels.
2. TFS Financial
TFS Financial (TFSL 0.08%), with roughly $14 billion in assets, is an interesting bank based in Cleveland. It operates on an old-fashioned thrift model, which means it relies on higher-cost funding sources such as certificates of deposits that are rate sensitive. In terms of lending, TFS has practically all of its loans in mortgages and home equity lines of credit. This sort of model has fallen out of favor as banks have transitioned to focus on stickier deposits from consumers and businesses and commercial lending.
Every year, TFS pays the majority of its profits out to shareholders in the form of dividends -- roughly 70% of profits in fiscal year 2021. Since 2019, the bank has paid at least 60% of its profits out in dividends. And since doing a partial initial public offering (IPO) in 2007, the company has repurchased nearly half of the outstanding shares owned by minority shareholders.
The bank's dividend currently has a 6.7% yield. Like many banks, it had to pause its dividend after the Great Recession, but reinstated it in 2014 and has since grown the dividend every year. The bank even raised it in 2020 and 2021 during the pandemic. They weren't big raises but symbolic nonetheless.
3. First Interstate BancSystem
Based in Billings, Montana, First Interstate BancSystem (FIBK 1.99%) has nearly $20 billion in assets and is a fairly strong performer. In 2021, it had a return on average assets, which shows how well management uses assets to generate profits, of more than 1%, which is considered very solid in the banking industry. First Interstate also had a return on equity of close to 10%, which is also very respectable.
Last September, First Interstate announced that it would acquire Great Western Bancorp, which will grow the bank to roughly $32 billion in assets and expand First Interstate in South Dakota, Omaha, Nebraska, and Des Moines, Iowa. The deal closed on Feb. 1. The size of the deal might have spooked some shareholders surprised about the sudden shift in strategy, but the bank is solidly run and offers a dividend yield of 4.3%. First Interstate looks like a really solid dividend stock. The company has paid a dividend since 2010 and has consistently increased it every year.
