In a market like the one we are experiencing right now, dividend stocks have been somewhat of a safe haven. The payouts can boost income or an investment's total return.
One reliable dividend stock over the past few years -- through the pandemic and this current sell-off -- is Ally Financial (ALLY 8.24%). The online banking pioneer has been able to increase its dividend every year for the past six years, including this year.
Ally Financial currently offers an attractive yield of 2.9% -- which is not only sustainable but could even be increased. Letʻs take a look at why Ally is a good dividend stock right now.
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Ally has a 2.9% yield and 15% payout ratio
Ally Financial was one of the original online only banks when it spun out of General Motor Acceptance Corp. (GMAC) -- the auto financing arm of General Motors -- in 2010. It went public in 2014 and started offering a dividend in 2016. Ally is a full-service digital bank, but true to its roots, it specializes in auto loans and is the nationʻs leading auto lender.
In the first quarter, Ally boosted its dividend for the sixth straight year, paying out a $0.30 dividend -- a 20% increase from the previous quarter. It maintained that $0.30 dividend in the second quarter, at a yield of 2.9%, which is about twice as high as the average dividend among S&P 500 stocks.
That yield is sustainable, given the fact that Ally has a payout ratio of just 15%. That means that only 15% of earnings goes toward the dividend. For context, a payout ratio under 50% is generally considered good, whereas a percentage that is too high -- say over 60% -- might be less sustainable, because the company is putting too much of its earnings toward the dividend and perhaps not as much in investing in its growth.
The payout ratio will vary by industry and company. A growth stock in a fast-growing industry may be inclined to have a lower payout ratio, while a value stock in a more stable industry with more predictable earnings would be comfortable with a 30% to 40% payout ratio. Ally would fall into the latter category, and with a 15% payout ratio, it is a good candidate to be able to sustain and boost that yield.
Loan originations were high in first quarter
As a testament to its stability, Ally was able to increase its dividend in 2020 when many other banks were unable to because of the pandemic-fueled recession. And there are a few reasons why Ally should be able to boost its dividend higher in the coming years.
While the auto sales market has not recovered as expected so far this year amid rising inflation and other factors, Ally had its best first quarter in 11 years with $11.6 billion of loan originations -- up 14% year over year -- with yields exceeding 7%. The rising rate environment we are in should improve its net interest margin and generate revenue growth as the auto market recovers.
Ally is also an extremely well-run, efficient company. As one of the largest online banks, it has little overhead compared to its competitors. It also has an excellent brand, as one of the oldest online banks.
The proof is its efficiency ratio, which is 45% -- far lower than its brick-and-mortar competitors (lower, in this case, is better). That allows it to have high margins -- with a 44% operating margin and a 34% profit margin -- and plenty of cash to boost its dividend. At the end of the first quarter, it had $3.9 billion in cash, but that was after buying online credit card company Fair Square Financial in an all-cash deal at the end of 2021.
Given its financials, Ally is in great shape to boost its dividend. Since it already did so this year, don't expect another bump in 2022. The economy and inflation just leave too many variables. But over the next few years, Ally is in a prime position to raise it dividend and its yield.
