Rampant inflation, Russia's invasion of Ukraine, and the Federal Reserve Board's aggressive interest rate hikes are all contributing factors to the current bear market. In response to this uncertainty, a growing number of investors are turning to the safety of stocks that generate good dividends to offset the losses.
Some of the best dividend stocks right now are in the banking industry, as large banks are forced by federal regulators to meet rigorous standards to ensure they remain well capitalized through even the worst economic stresses. Perhaps the best dividend in the banking industry is PNC Financial Services Group (PNC 1.08%).
PNC boosted its dividend by 20% in Q2
PNC Financial is the sixth-largest bank in the country, with about $535 billion in assets at the end of the first quarter. It has raised its dividend for the past 12 straight years, including through the COVID-19 recession in 2020, when the Fed placed a moratorium on banks raising their dividends. But as soon as the moratorium was lifted in the second quarter of 2021, PNC boosted the dividend by about 8%.
In the second quarter of this year, PNC raised its dividend again, this time by 20% to $1.50 per share. PNC offers a healthy 3.83% yield, which is higher than the financial sector median. It has a payout ratio of 37%, which falls within its historical range.
"The significant increase in our dividend is reflective of PNC's financial performance, strong capital levels and our board's confidence in our business model and strategies," said PNC Chairman and Chief Executive Officer William Demchak.
Across four quarters, PNC pays out $6 per share in dividends with this raise. So, if you owned 50 shares at its current $153 share price, you'd have $75 per quarter and $300 per year in income that could be reinvested in the stock or kept as income. Here's why PNC should be able to continue to boost the dividend.
PNC has excellent financials to support dividend
PNC's stock price is down about 24% year to date and 20% over the past 12 months. Over the past 10 years, it has posted an annualized return of 10%, roughly on par with the S&P 500 over that same period.
A key to sustaining that dividend is to have a strong capital foundation on which to support it. PNC indeed has that foundation with $62 billion in cash and cash equivalents and $7.2 billion in cash flow from operations. PNC also has low debt with a debt-to-equity ratio of 0.54, which means that the operations are funded mostly from equity, not debt.
PNC also has had consistent revenue growth. In the first quarter, revenue increased 12% year over year to $4.7 billion. Net income was down about 22% to $1.4 billion, but that was mainly related to higher expenses related to the integration of PNC's acquisition of BBVA's (Banco Bilbao Vizcaya Argentaria) U.S. banking operations last year. PNC has initiated an effort to reduce expenses by $300 million in 2022.
The acquisition of BBVA USA is a key piece to PNC's growth as it gives the bank a national footprint, with a presence in 29 of the 30 largest markets in the country.
The banking industry is cyclical and could struggle if we move into a recession, but PNC is built to weather the downturns and continue to support its dividend. And during this period of uncertainty, that dividend income is even more critical. It may just be the best dividend in the banking industry, and it would make a good addition to a portfolio for investors looking for dividend income.
